Fraud and Internal Control

Fraud and Internal Control

1. Principles of Internal Control

   • Establish Responsibilities
     • Responsibility is clearly established and assigned to one employee.
   • Maintain Adequate Records
     • Company activities are monitored through DETAILED records, so activities can be tracked from where it came from to where it is going
   • Insure Assets and Bond Key Employees
     • Get insurance for assets in case of loss. Bond employees who handle lots of cash or easily transferrable assets.
   • Separate Recordkeeping from Custody of Assets
     • The person who controls or has access to an asset should not have access to its accounting records.
   • Divide Responsibility for Related Transactions
     • Ensures the work of one employee acts as a check on another.
   • Apply Technological Controls
     • Cash registers, time clocks and ID scanners

2. Technology

   • Reduced Processing Errors
     • Does not eliminate error, humans still need to be involved.
   • More Extensive Testing of Records
     • All data is easily accessible
   • New Evidence of Processing
     • a system can record who, when and where the entries were made.
   • Separation of Duties
     • Checks and Balances
   • Increased E-Commerce
     • Comes with risks, credit card theft, viruses, identity theft.

3. Purpose of Internal Control

   • Internal Control System
     • Managers of companies use internal control systems to monitor and control activities.
       • Protect Assets
       • Promote efficient operations
       • Ensure reliable accounting
       • Uphold company policies
   • Sarbanes-Oxley Act
     • Requires managers and auditors of companies that are publicly traded to document and verify internal controls
       • must have effective internal controls
       • Auditors must evaluate controls
       • Violators can face up to 25 years in prison with fines
       • Overseen by the Public Company Accounting Oversight Board
   • Committee of Sponsoring Organizations
     • 5 ingredients of internal control
       • Control Environment
       • Risk Assessment
       • Control Activities
       • Info & Communication
       • Monitoring

4. Limitations of Internal Control

   • Opportunity
     • low risk of getting caught
   • Pressure
     • has an incentive to commit fraud
   • Rationalization
     • justifies or does not see it as a crime