topic 3

  1. Fraud (legal)
    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
  2. Fraud (AICPA)
    an intentional act that results in a material misstatement in financial statements
  3. two types of fraud
    • fraudulent financial reporting
    • fraud arising from misappropriation of assets
  4. 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)
  5. sarbanes-oxley act
    help prevent fraudulent financial reporting by publicly held companies and to restore investors' confidence in the U.S. capital marketing system
  6. the act established a new board
    PCAOB to oversee the auditing standards
  7. 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
  8. PCAOB restricted the ___ and established severe
    types of non-audit services that CPAs can provide

    criminal penalties for fraud and destruction of records
  9. 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
  10. 5 components of internal control
    • information and communication
    • control activities
    • risk assessment
    • monitoring
    • control environment
  11. 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
  12. 7 objectives
    • occurrence
    • completeness
    • authorization
    • accuracy
    • posting and summarization
    • classification
    • timeliness
  13. occurrence
    all recorded transactions are valid- really occurred
  14. completeness
    all valid transactions are recorded
  15. authorization
    all transactions are properly authorized
  16. accuracy
    all transactions are recorded at right amounts
  17. posting and summarization
    all transactions are correctly totaled in the journals and properly posted to the ledgers
  18. classification
    proper accounts are debited and credited when recording transactions
  19. timeliness
    recorded promptly and in the correct acct period
  20. control activities
    company's policies and procedures that help ensure that management directives are carried out and that the acct systems objectives are met
  21. control activities deals with
    • computer controls (general and application)
    • physical controls (6)
  22. 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
  23. application controls
    more specific, applying to the handling of a particular type of transaction, i.e. sales transactions
  24. input controls (4)
    validation rules, passwords, range test, length test
  25. physical controls related to manual procedures (6)
    • authorization of transactions
    • segregation of duties
    • supervision
    • adequate documents and records
    • access controls
    • independent verification
  26. management's risk assessment
    the identification, analysis, management of risks relevant to the preparation of financial statements
  27. monitoring
    process of assessing the quality of internal control performance over tim. allows management to determine whether internal control is operating effectively
  28. Control environment
    reflects overall attitudes of top management about controls and their importance to the company
Card Set
topic 3
topic 3