Chapter 7: Fraud and Internal Control

Question 1

Define fraud

Answer 1

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

Question 2

What three factors contribute to fraudulent activity?

Answer 2

1. Opportunity
2. Financial pressure
3. Rationalization

Question 3

What are the five primary components of internal control?

Answer 3

1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring

Question 4

What are the six principles of internal control activities?

Answer 4

1. Establishment of responsibility
2. Segregation of duties
3. Documentation procedure
4. Physical controls
5. Independent internal verification
6. Human resource controls

Question 5

What is the establishment of responsibility?

Answer 5

Limiting access only to authorized personnel and then identifying those personnel

Ex: In cash receipt controls, only designated personnel are authorized to handle cash receipts (cashiers)

Question 6

What is the segregation of duties?

Answer 6

Different individuals should be responsible for related activities, and no one should have overlapping duties.

Question 7

What is meant by documentation procedure?

Answer 7

Companies should use prenumbered documents and all documents should be accounted for

Question 8

What are physical controls?

Answer 8

Safes, vaults, alarms, keys, passwords, etc.

Question 9

What is independent internal verification?

Answer 9

An independent employee periodically verifies records. Any discrepancies are reported to management.

Question 10

What is human resource controls?

Answer 10

Be able to identify which employees handled cash, rotate employees duties and require vacations, conduct background checks

Question 11

How should mail recipts be handled with internal controls?

Answer 11

1. Opened by two people
2. Clerk signs the list
3. Original copy of the list
4. Copy of the list

Question 12

What is a good way to think of Petty cash funds?

Answer 12

Like pocket money

Question 13

What three things are involved with petty cash?

Answer 13

1. Establshing the fund
2. Making payments form the fund
3. Replensihing the fund

Question 14

How do banks contribute significantly to good internal control regarding cash?

Answer 14

1. Minimize the amount of currency on hand
2. Creates a double record of bank transactions
3. Bank reconciliation

Question 15

What 7 items are on a bank reconciliation?

Answer 15

1. Deposit in transit
2. Outstanding checks
3. Company errors
4. Interest earned
5. NSF checks
6. Bank service charge
7. Bank errors

The above are also known as time lags

Question 16

How does the bank make adjustments to the bank balance?

Answer 16

Deposit in transit - outstanding checks +/- bank errors = correct balance

Question 17

How does the company make adjustments to the book balance?

Answer 17

Notes collected by bank - NSF (bounced) checks, - check printing or other service charges +/- company errors = correct balance

Question 18

T/F: The bank balance and book balance must be equal

Answer 18

True