Bodnar/Hopwood AIS 7th Ed1 Chapter 5 u TRANSACTION PROCESSING AND INTERNAL CONTROL PROCESS

Bodnar/Hopwood AIS 7th Ed2 Controls and Exposures u Controls are needed to reduce exposures.

Bodnar/Hopwood AIS 7th Ed3 Control and Exposure u An exposure consists of the potential financial effect of an event multiplied by its probability of occurrence. u Controls rarely affect the causes of exposures.

Bodnar/Hopwood AIS 7th Ed4 Common Exposures EXPOSURES Excessive Costs Excessive Costs Deficient Revenue Deficient Revenue Inaccurate Accounting Inaccurate Accounting Loss of Assets Loss of Assets

Bodnar/Hopwood AIS 7th Ed5 Common Exposures EXPOSURES Business Interruption Business Interruption Statutory Sanctions Statutory Sanctions Fraud and Embezzlement Fraud and Embezzlement Competitive Disadvantages Competitive Disadvantages

Bodnar/Hopwood AIS 7th Ed6 White-collar Crime u a grouping of illegal activities that are differentiated from other illegal activities in that they occur as part of the occupation of the offender

Bodnar/Hopwood AIS 7th Ed7 Fraud and White-Collar Crime u What are the three basic forms of theft in white-collar crime? 1 Employee theft 2 Employee-outsider theft 3 Management fraud

Bodnar/Hopwood AIS 7th Ed8 Fraudulent Financial Reporting u intentional or reckless conduct, whether by purposeful act or omission, that results in materially misleading financial statements

Bodnar/Hopwood AIS 7th Ed9 Corporate Crime u white-collar crime that benefits a company or organization, rather than the individuals who perpetrate the fraud

Bodnar/Hopwood AIS 7th Ed10 Forensic Accounting u one of several terms which is used to describe the activities of persons who are concerned with preventing and detecting fraud

Bodnar/Hopwood AIS 7th Ed11 The National Association of Certified Fraud Examiners u provides bona fide qualifications for Certified Fraud Examiners through administration of the Uniform CFE Examination

Bodnar/Hopwood AIS 7th Ed12 Seriousness of Fraud u More than 75% respondents in survey experienced fraud during the past year, with 23% reporting losses of $1,000,000 or more.

Bodnar/Hopwood AIS 7th Ed13 Computer Processing and Exposures u Many aspects of computer processing tend to significantly increase an organization's exposure to undesirable events.

Bodnar/Hopwood AIS 7th Ed14 Control Objectives and Transaction Cycles u Each transaction cycle will have exposures. u Management should develop detailed control objectives for each transaction cycle.

Bodnar/Hopwood AIS 7th Ed15 Control Objectives and Transaction Cycles Customers should be authorized in accordance with management’s criteria. Prices and terms of goods and services should be authorized in accordance with management’s 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

Bodnar/Hopwood AIS 7th Ed16 Control Objectives and 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 management’s criteria. Control Objectives: Expenditure Cycle

Bodnar/Hopwood AIS 7th Ed17 Internal Control u Internal control is a process effected by an entity’s board of directors, management, and other personnel--designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

Bodnar/Hopwood AIS 7th Ed18 Internal Control u a) reliability of financial reporting, u b) effectiveness and efficiency of operations, and u c) compliance with applicable laws and regulations

Bodnar/Hopwood AIS 7th Ed19 Internal Control Process u the control environment u risk assessment u control activities u information and communication u monitoring

Bodnar/Hopwood AIS 7th Ed20 Major Premises u responsibility: management is responsible u reasonable assurance: relative costs and benefits

Bodnar/Hopwood AIS 7th Ed21 The Federal Foreign Corrupt Practices Act of 1977 (FCPA) u requires all companies subject to the Securities Exchange Act of 1934 to u make and keep books, records, and accounts,... u devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances

Bodnar/Hopwood AIS 7th Ed22 Control Environment u the collective effect of various factors on establishing, enhancing, or mitigating the effectiveness of specific policies and procedures u sets the overall tone

Bodnar/Hopwood AIS 7th Ed23 Control Environment Factors u management philosophy and operating style u organizational structure u board of directors and its committees u human resource policies and procedures

Bodnar/Hopwood AIS 7th Ed24 Risk Assessment u the process of identifying, analyzing, and managing risks that affect the company’s objectives

Bodnar/Hopwood AIS 7th Ed25 Control Activities u The policies and procedures established to help ensure that management directives are carried out.

Bodnar/Hopwood AIS 7th Ed26 Potential Control Activities u segregation of duties u proper forms for recording of transactions u restricted access to assets u authorization u independent checks

Bodnar/Hopwood AIS 7th Ed27 Information and Communication u 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

Bodnar/Hopwood AIS 7th Ed28 Documentation of the Accounting System u Accounting procedures should be set forth in accounting procedure manuals so that policies and instructions may be explicitly known and uniformly applied.

Bodnar/Hopwood AIS 7th Ed29 Audit Trail u 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.

Bodnar/Hopwood AIS 7th Ed30 Monitoring u involves the ongoing process of assessing the quality of internal controls over time and taking corrective actions when necessary

Bodnar/Hopwood AIS 7th Ed31 Internal Audit u An internal audit function is common in large organizations to monitor and evaluate controls on an ongoing basis.

Bodnar/Hopwood AIS 7th Ed32 Transaction Processing Controls u General controls affect all transaction processing. u Application controls are specific to individual applications.

Bodnar/Hopwood AIS 7th Ed33 General Controls u plan of data processing organization u general operating procedures u equipment control features u equipment and data-access controls

Bodnar/Hopwood AIS 7th Ed34 Types of Controls u Preventative controls act to prevent errors and fraud before they happen. u Detective controls act to uncover errors and fraud after they have occurred. u Corrective controls act to correct errors.

Bodnar/Hopwood AIS 7th Ed35 Communicating the Objectives of Internal Control u 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.

Bodnar/Hopwood AIS 7th Ed36 Analytical Techniques u internal control questionnaire u application controls matrix