Chapter 7

Question 1

Fraud

Answer 1

dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

Question 2

three factors that contribute to fraudulent activity

Answer 2

opportunity
financial pressure
rationalization

Question 3

internal control

Answer 3

method and measures adopted to

1. safeguard assets
2. enhance accuracy and reliability of accounting records
3. increase effciency of operations
4. ensure compliance with laws and regulations

Question 4

five primary components

Answer 4

1. control environment
2. risk assessment
3. .control activities
4. information and communication
5. monitoring

Question 5

principles of internal control activities

segregation of duties

Answer 5

different individuals should be responsible for related activities

the responsibility for record keeping for an asset should be separate from the physical custody of that asset

Question 6

ESTABLISHMENT OF RESPONSIBILITY

Answer 6

􏰾 Control is most effective when only one person is responsible for a given task.
􏰾 Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel.

Question 7

DOCUMENTATION PROCEDURES

Answer 7

Companies should use prenumbered documents, and all documents should be accounted for.

Employees should promptly forward source documents for accounting entries to the accounting department.

Question 8

Principles of Internal Control Activities

Answer 8

1. physical controls

2. mechanical and electronic controls

Question 9

INDEPENDENT INTERNAL VERIFICATION

Answer 9

Records periodically verified by an employee who is independent.

Discrepancies reported to
management

Question 10

HUMAN RESOURCE CONTROLS

Answer 10

􏰾 Bond employees who handle cash.
􏰾 Rotate employees’ duties and require vacations.
􏰾 Conduct background checks.

Question 11

Limitations of Internal Control

Answer 11

􏰾 Costs should not exceed benefit.
􏰾 Human element.
􏰾 Size of the business.