CH 052

Bodnar/Hopwood AIS 7th Ed 1
Chapter 5
TRANSACTION PROCESSING AND
INTERNAL CONTROL PROCESS
Controls and Exposures
Controls are needed to reduce exposures.
Control and Exposure
An exposure consists of the potential
financial effect of an event multiplied by its
probability of occurrence.
Controls rarely affect the causes of
exposures.
Common Exposures
EXPOSURES
Excessive
Costs
Deficient
Revenue
Inaccurate
Accounting
Loss of
Assets
Common Exposures
EXPOSURES
Business
Interruption
Statutory
Sanctions
Fraud and
Embezzlement
Competitive
Disadvantages
White-collar Crime
a grouping of illegal activities that are
differentiated from other illegal activities in
that they occur as part of the occupation of
the offender
Fraud and White-Collar Crime
What are the three basic forms of theft in
white-collar crime?
1 Employee theft
2 Employee-outsider theft
3 Management fraud
Fraudulent Financial Reporting
intentional or reckless conduct, whether by
purposeful act or omission, that results in
materially misleading financial statements
Corporate Crime
white-collar crime that benefits a company
or organization, rather than the individuals
who perpetrate the fraud
Forensic Accounting
one of several terms which is used to
describe the activities of persons who are
concerned with preventing and detecting
fraud
The National Association of
Certified Fraud Examiners
provides bona fide qualifications for
Certified Fraud Examiners through
administration of the Uniform CFE
Examination
Seriousness of Fraud
More than 75% respondents in survey
experienced fraud during the past year, with
23% reporting losses of $1,000,000 or
more.
Computer Processing and
Exposures
Many aspects of computer processing tend
to significantly increase an organization's
exposure to undesirable events.
Control Objectives and
Transaction Cycles
Each transaction cycle will have exposures.
Management should develop detailed
control objectives for each transaction
cycle.
Transaction Cycles
Customers should be authorized in accordance
with managements criteria.
Prices and terms of goods and services should be
authorized in accordance with managements criteria.
All shipments of goods and services provided
should result in a billing to the customer.
Billings to customers should be accurately and
promptly classified, summarized, and reported.
Control Objectives: Revenue Cycle
Transaction Cycles
Amounts due to vendors should be accurately and
promptly classified, summarized, and reported.
Compensation rates and payroll deductions
should be authorized in accordance with
managements criteria.
Control Objectives: Expenditure Cycle
Internal Control
Internal control is a process effected by an
entitys board of directors, management,
and other personnel--designed to provide
reasonable assurance regarding the
achievement of objectives in the following
categories:
Internal Control
a) reliability of financial reporting,
b) effectiveness and efficiency of
operations, and
c) compliance with applicable laws and
regulations
Internal Control Process
the control environment
risk assessment
control activities
information and communication
monitoring
Major Premises
responsibility: management is responsible
reasonable assurance: relative costs and
benefits
The Federal Foreign Corrupt
Practices Act of 1977 (FCPA)
requires all companies subject to the
Securities Exchange Act of 1934 to
make and keep books, records, and
accounts, ...
devise and maintain a system of internal
accounting controls sufficient to provide
reasonable assurances
Control Environment
the collective effect of various factors on
establishing, enhancing, or mitigating the
effectiveness of specific policies and
procedures
sets the overall tone
Control Environment Factors
management philosophy and operating style
organizational structure
board of directors and its committees
human resource policies and procedures
Risk Assessment
the process of identifying, analyzing, and
managing risks that affect the companys
objectives
Control Activities
The policies and procedures established to
help ensure that management directives are
carried out.
Potential Control Activities
segregation of duties
proper forms for recording of transactions
restricted access to assets
authorization
independent checks
Information and Communication
refers to the organization's accounting
system, which consists of the methods and
records established to identify, assemble,
analyze, classify, record, and report the
organization's transactions and to maintain
accountability for the related assets and
liabilities
Documentation of the Accounting
System
Accounting procedures should be set forth
in accounting procedure manuals so that
policies and instructions may be explicitly
known and uniformly applied.
Audit Trail
An audit trail exists if a financial total that
appears in a general ledger account can be
supported by evidence concerning all the
individual transactions that comprise that
total and vice versa.
Monitoring
involves the ongoing process of assessing
the quality of internal controls over time
and taking corrective actions when
necessary
Internal Audit
An internal audit function is common in
large organizations to monitor and evaluate
controls on an ongoing basis.
Transaction Processing Controls
General controls affect all transaction
processing.
Application controls are specific to
individual applications.
General Controls
plan of data processing organization
general operating procedures
equipment control features
equipment and data-access controls
Types of Controls
Preventative controls act to prevent errors
and fraud before they happen.
Detective controls act to uncover errors and
fraud after they have occurred.
Corrective controls act to correct errors.
Communicating the Objectives of
Internal Control
The system must be designed such that each
employee is convinced that controls are
meant to prevent difficulties or crises in the
operation of the organization that could
otherwise affect him or her very personally.
Analytical Techniques
internal control questionnaire
application controls matrix

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Bodnar/Hopwood AIS 7th Ed 1

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