topic 3

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

an intentional act that results in a material misstatement in financial statements

• fraudulent financial reporting
• fraud arising from misappropriation of assets

(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)

help prevent fraudulent financial reporting by publicly held companies and to restore investors' confidence in the U.S. capital marketing system

PCAOB to oversee the auditing standards

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

types of non-audit services that CPAs can provide

criminal penalties for fraud and destruction of records

• 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

• information and communication
• control activities
• risk assessment
• monitoring
• control environment

a company's informaiton system includes acct system and related internal controls and should be designed to achieve 7 objectives

• occurrence
• completeness
• authorization
• accuracy
• posting and summarization
• classification
• timeliness

all recorded transactions are valid- really occurred

all valid transactions are recorded

all transactions are properly authorized

all transactions are recorded at right amounts

all transactions are correctly totaled in the journals and properly posted to the ledgers

proper accounts are debited and credited when recording transactions

recorded promptly and in the correct acct period

company's policies and procedures that help ensure that management directives are carried out and that the acct systems objectives are met

• computer controls (general and application)
• physical controls (6)

apply to the processing of most or all transactions; they usually affect most or all of the applications (programs) on a computer system

more specific, applying to the handling of a particular type of transaction, i.e. sales transactions

validation rules, passwords, range test, length test

• authorization of transactions
• segregation of duties
• supervision
• adequate documents and records
• access controls
• independent verification

the identification, analysis, management of risks relevant to the preparation of financial statements

process of assessing the quality of internal control performance over tim. allows management to determine whether internal control is operating effectively

reflects overall attitudes of top management about controls and their importance to the company