Chapter 6
•Internal control system- consists of the policies and procedures
managers use to protect assets, ensure reliable accounting, promote
efficient operations, and urge adherence to company policies
•Internal control systems help prevent avoidable losses, help managers
plan operations, and monitor company and employee performance
•Sarbanes-Oxley Act (SOX)- requires the managers and auditors of companies
whose stock is traded on exchange to document and certify the system of
internal controls
•Section 404- section of SOX that requires managers to document and
assess the effectiveness of all internal control processes that can impact
financial reporting
•Principles of Internal Control
1. Establish responsibilities
2. Maintain adequate records
3. Insure assets and bond key employees
4. Separate recordkeeping from custody of assets
5. Divide responsibility for related transactions
6. Apply technological controls
7. Perform regular and independent reviews
•Principles link to five aspects of internal control
1. Control activities
2. Control environment
3. Risk assessment
4. Monitoring
5. Communication
•Establish responsibilities- the responsibility for a task is clearly
established and assigned to one person
•Bonded- when a company purchases an insurance policy, or bond, against
losses from theft by that employee
•Collude- agree in secret to commit fraud
•Separation of duties-divides responsibility for a transaction or a series
of related transactions between two or more individuals or departments
•E-Commerce activities involve 3 risks
1. Credit card number theft
2. Computer viruses
3. Impersonation
•Human error- can occur from negligence, fatigue, misjudgment, or confusion
•Human fraud0 intent by people to defeat internal controls for personal gain
•Triple threat of fraud
1. Opportunity- internal control deficiencies in the workplace
2. Pressure- financial, family, society, and other stresses to succeed
3. Rationalization- employees justifying fraudulent behavior
