Unit 3 Discussion: Fraud and Internal Controls
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This discussion is designed to reinforce learning objectives 4.1.
Fraud is intentional deceit or trickery that results in a misstatement of the financial statements. Management is responsible for taking steps to reduce the risk of fraud. After quite a few instances of fraud in many large, publicly owned companies in recent years, a number of accounting reforms have been instituted to safeguard against fraud. One major change was the Sarbanes-Oxley Act (SOX) of 2002.
SOX included a set of reforms that toughened penalties for corporate fraud, restricted the types of consulting that CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board (PCAOB). SOX requires publicly traded companies to follow government policies and procedures.
Since cash is the most liquid of all assets, it needs to be safeguarded. Both large and small companies are susceptible to fraud and other unethical activities without proper controlsin place. Managers and business owners can protect against fraud by using aninternal control system to protect their assets. An effective control systemcan also help businesses to conductreliable accounting, operate efficiently, and encourage employees to follow company policies.
To ensure that the internal controls implemented around cash are designed properly, there should be a segregation of duties:
In an ideal situation, there should be oneindividual assigned the responsibilityof only one component. The record keeping function of an asset should be separated from the custody of an asset. In addition, the individual responsible for authorizing a transaction related to cash should notbe thesame person that hascustody of that cash orperforms the recordkeeping.Furthermore, reconciliations should be completed bydifferent individuals to ensure that the internal controls are working effectively. This includes doing physical audits, checks, and reviews of internal control procedures that arein place to catch errors in time and to avoid fraud.
Now that you understand segregation of employee duties, imagine you own a small retail business and employ four employees. Please respond to the following prompts related to your small retail business in your initial post:
Identify the type of company you own and briefly describe the nature of your business. Perhaps you sell shoes, clothing, furniture, or computers. You might own a restaurant or a small drug store or small walk-in health clinic.
Identify at least two kinds of internal control procedures that you can implement to protect your cash.
How would you protect the cash in your vault?
How would you protect the cash in your cash register?
How would you protect the cash in your bank account?
How can internal controls help to protect your cash receipts and disbursements?
How can you use technology to implement an effective internal control system to help your business? Explain your answers.
Required Reply Posts
When you reply to your classmates, discuss how your control system differs from your classmates. Do you think your classmates’ controls will be enough to protect cash assets? Why or why not?
Your discussion post (your main post and replies), will be graded on content and your level of participation. It is important to stay current in discussion threads. You should be an active, regular participant in these discussions.
For more information about discussion grading criteria, visit the Undergraduate Discussion Participation Policies and Rubric page located in ECPI Resources.
To post to the discussion, click on the “Reply” button above all the posts below. You may copy/paste the text of your assignment into the text box. Alternatively, you can choose to type directly into the text box. When you choose this option, please double check to make sure you have spelled everything correctly. Once you have finished writing your post, please press the “Post Reply” button. This will complete the submission process for your post.
To respond to someone else’s post, click on the “Reply” button immediately below the discussion post to which you wish to respond.
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