a fault representation of a material fact made by one party to another party with the intent to deceiver and to induce the other party to rely on the fact to his or her detriment
Fraud (AICPA)
an intentional act that results in a material misstatement in financial statements
two types of fraud
fraudulent financial reporting
fraud arising from misappropriation of assets
three conditions are almost always present when fraud is committed
(1) incentive/financial pressure to commit the 2 types
(2) opportunity to carry out the fraud
(3) rationalization/low integrity (to justify committing the fraud)
sarbanes-oxley act
help prevent fraudulent financial reporting by publicly held companies and to restore investors' confidence in the U.S. capital marketing system
the act established a new board
PCAOB to oversee the auditing standards
PCAOB strengthened the relationship between corporate audit committees and auditors by
requiring auditors to report directly to the company's audit committee rather than to management and all members of audit committee tot be independent from management
PCAOB restricted the ___ and established severe
types of non-audit services that CPAs can provide
criminal penalties for fraud and destruction of records
company's internal control system should be designed to
1. ensure accurate and reliable fin reporting
2. safeguard company's assets
3. promote effectiveness and efficiency of operations
4. promote compliance with management's policies and applicable laws and regulations
5 components of internal control
information and communication
control activities
risk assessment
monitoring
control environment
information and communication (acct system)
a company's informaiton system includes acct system and related internal controls and should be designed to achieve 7 objectives
7 objectives
occurrence
completeness
authorization
accuracy
posting and summarization
classification
timeliness
occurrence
all recorded transactions are valid- really occurred
completeness
all valid transactions are recorded
authorization
all transactions are properly authorized
accuracy
all transactions are recorded at right amounts
posting and summarization
all transactions are correctly totaled in the journals and properly posted to the ledgers
classification
proper accounts are debited and credited when recording transactions
timeliness
recorded promptly and in the correct acct period
control activities
company's policies and procedures that help ensure that management directives are carried out and that the acct systems objectives are met
control activities deals with
computer controls (general and application)
physical controls (6)
general controls
apply to the processing of most or all transactions; they usually affect most or all of the applications (programs) on a computer system
application controls
more specific, applying to the handling of a particular type of transaction, i.e. sales transactions
input controls (4)
validation rules, passwords, range test, length test
physical controls related to manual procedures (6)
authorization of transactions
segregation of duties
supervision
adequate documents and records
access controls
independent verification
management's risk assessment
the identification, analysis, management of risks relevant to the preparation of financial statements
monitoring
process of assessing the quality of internal control performance over tim. allows management to determine whether internal control is operating effectively
Control environment
reflects overall attitudes of top management about controls and their importance to the company