Association of Certified Fraud Examiners (ACFE) Largest antifraud organization
Occupational Fraud Use of one's occupation for personal enrichment through deliberate misuse or misapplication of the employing organization's resources.
Internal Controls 1. Safeguard company's assets 2. Improve accur...
ACG 2021 Exam 2 Questions and
Complete Solutions
Association of Certified Fraud Examiners (ACFE) ✅Largest antifraud organization
Occupational Fraud ✅Use of one's occupation for personal enrichment through
deliberate misuse or misapplication of the employing organization's resources.
Internal Controls ✅1. Safeguard company's assets
2. Improve accuracy and reliability of accounting information
Fraud Cases ✅90% involves the theft or misuse of company's resources.
Another example is the manipulation of financial statements.
Recent Scandals ✅Enron and WorldCom
Both audited by Arthur Andersen
Sarbanes-Oxley Act (SOX) ✅Public Company Accounting Reform and Investor
Protection Act of 2002. New standards for auditing and internal controls to ensure no
major fraud occurs. Section 404 :
1. company management must document and assess all internal control processes
2. auditors produce opinion on managements assessments
Committee of Sponsoring Organizations (COSO) ✅To improve quality of financial
reporting.
5 Components of effective control according to COSO ✅1. Continual
Monitoring/reporting of internal activities and deficiencies.
2. Control Activities such as authorizations, reconciliations and separation of duties to
help ensure management's directives are being carried out.
3. Risk Assessment to analyze internal and external risk factors that could prevent a
company's objectives from being reached.
4. Control Environment to set overall ethical tone of the company with respect to internal
control.
5. Information and communication
Two general types of Control Activities ✅1. Preventive - Designed to keep errors or
fraud from occurring in the first place.
2. Detective - Designed to detect errors or fraud that have already occurred.
Preventive Controls ✅1. Seperation of Duties
, 2. Physical Controls over assets and accounting records such as storing cash in the
safe etc.
3. Proper Authorization to prevent improper use of company resources.
4. Employee management to guide employees and ensure they are fully knowledgable
about the company's internal controls.
Limitations of Internal Controls ✅1. Collusion of fraud/theft between employees is
harder to detect compared to someone going solo.
2. Top-level employees who can override internal controls have the ability to commit
fraud.
Cash ✅Includes currency, coins, balances in savings and checking accounts as well
as checks and cash equivalents (investments that mature in 3 months or less).
Controls over cash receipts ✅1. Record all cash receipts as soon as possible.
2. List and record all checks received.
3. Deposit cash and checks each day.
4. Record cash receipts to compare to bank/accounting records.
5. Accept credit/debit cards to limit amount of physical cash employees have to handle.
Controls of Cash disbursements ✅1. Make all disbursements by Card or Check for a
permanent record.
2. Authorize all expenditures before purchase and verify accuracy of purchase itself.
Reconciling steps ✅1. Reconcile bank's cash balance
2. Reconcile company's cash balance
3. Adjust the company's cash balance - after adjustment, Company and Bank balance
must be equal!
* Every Bank Reconciliation journal entry involves cash
Deposits Outstanding ✅Cash receipts of the company that have not been added to the
bank's record of the company's balance.
Checks Outstanding ✅Checks written by the company that have not been subtracted
from the bank's record of the company's balance.
*Only Check/Deposits outstanding will affect the bank balance side of a bank
reconciliation
NSF Checks ✅Non-sufficient funds check or 'bad' checks
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