Fraud, Internal Control, and Cash (Chapter 7)

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fraud

a dishonest act by an employee that results in personal benefit to the employee at a cost to the

fraud triangle

three main factors that contribute to fraudulent activity
1. opportunity
2. financial pressure
3. rationalization

The Sarbanes-Oxley Act (SOX)

all publicly traded U.S. corporations are required to maintain an adequate system of internal control and audits

Internal Control

consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations

purpose of internal control 1

Safeguard a company's assets from employee theft, robbery, and unauthorized use

internal auditors

company employees who continuously evaluate the effectiveness of the company's internal control systems

bonding

obtaining insurance protection against theft by employees

Human Resource Control 1

bonding employees who handle cash

Human Resource Control 2

rotate employee's duties and require employees to take vacations

Human Resource Control 3

conduct thorough background checks

voucher system

a network of approvals by authorized individuals, acting independently, to ensure dis, a network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper

voucher

an authorization from prepared , An authorization form prepared for each expenditure in a voucher system

petty cash fund

to pay relatively small amounts

bank reconciliation

compares the bank's balance with the company's balance and explains any differences to make them agree

check

a written order signed by the depositor directing the bank to pay a specific sum of money to a designated receipt

bank statements

shows the depositor's bank transactions and balances

bank service charge

a monthly fee

deposits in transit

deposits recorded by the depositor that have not been recorded by the bank

outstanding checks

issued checks recorded by the company but have not yet been paid by the bank

cash equivalents

short-term highly liquid investments that are readily convertible to cash and insensitive to changes in the market

restricted cash

cash that is not available for general use

Principle of Internal Control 1

establishment of responsibility

Principle of Internal Control 2

segregation of duties

Principle of Internal Control 3

documentation procedures

Principle of Internal Control 4

physical controls

Principle of Internal Control 5

independent internal verification

Principle of Internal Control 6

human resource controls

Purpose of Internal Control 2

Enhance accuracy and reliability of the accounting records by reducing the risk of errors
(unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the
accounting process.

Purpose of Internal Control 3

Increase efficiency of operations

Purpose of Internal Control 4

Ensure compliance with laws and regulations

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