Sarbanes-Oxley, Internal Control, and Cash

320

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash

Internal Control Internal Control—Integrated Framework is the standard by which companies design, analyze, and evaluate internal control. 4 In this section, the objectives of internal con- trol are described, followed by a discussion of how these objectives can be achieved through the Integrated Framework’s five elements of internal control. Objectives of Internal Control The objectives of internal control are to provide reasonable assurance that: 1. Assets are safeguarded and used for business purposes. 2. Business information is accurate. 3. Employees and managers comply with laws and regulations. These objectives are illustrated below. Internal control can safeguard assets by preventing theft, fraud, misuse, or misplace- ment. A serious concern of internal control is preventing employee fraud. Employee fraud is the intentional act of deceiving an employer for personal gain. Such fraud may range from minor overstating of a travel expense report to stealing millions of dollars. Employees stealing from a business often adjust the accounting records in order to hide their fraud. Thus, employee fraud usually affects the accuracy of business information. Accurate information is necessary to successfully operate a business. Businesses must also comply with laws, regulations, and financial reporting standards. Examples of such standards include environmental regulations, safety regulations, and generally accepted accounting principles GAAP. Describe and illustrate the objectives and elements of internal control. Business Connection EMPLOYEE FRAUD The Association of Fraud Examiners estimates that 5 of annual revenues worldwide or about 2.9 trillion is lost to employee fraud. A common cash receipts em- ployee fraud can occur when employees accept cash payments from customers, do not record the sale, and then pocket the cash. A common cash payments employee fraud can occur when employees bill their employer for false services or personal items. Source: 2010 Report to the Nation on Occupational Fraud and Abuse, Association of Fraud Examiners. Elements of Internal Control The three internal control objectives can be achieved by applying the five elements of internal control set forth by the Integrated Framework. 5 These elements are as follows: 1. Control environment 2. Risk assessment 4 Internal Control—Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission, 1992. 5 Ibid., pp. 12–14. © C engage L ear ning 2014 Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook andor eChapters. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash