Accounting information system an overview 9e bodnar hopwood chapter 04

Control Objectives and Transaction CyclesCustomers should be authorized in accordance with management’s criteria.. Control Objectives and Transaction CyclesVendors should be authorized i

Transaction Processing

and the Internal Control

Process

Chapter 4

Learning Objective 1

Understand the nature

of control exposures.

Controls and Exposures

Controls are needed to reduce exposures

An exposure consists of the potentialfinancial effect of an event multiplied

by its probability of occurrence

Controls rarely affect the causes of exposures

Competitive disadvantages Inaccurate

accounting

Fraud and White-Collar Crime

What is white-collar crime?

Grouping of illegal activities that are differentiated

from other illegal activities in that they occur

as part of the occupation of the offender

It often involves the entry of fictitioustransactions into an accounting system

Fraud and White-Collar Crime

Employee theftEmployee-outsider theft

Management fraud

Fraud and White-Collar Crime

White-collar crime may result in

fraudulent financial reporting.

Corporate crime is a white-collar crime that

benefits a company or organization ratherthan the individuals who perpetrate the fraud

Fraud and White-Collar Crime

What is forensic accounting?

Forensic accounting is one of several termsused to describe the activities of personswho are concerned with preventing anddetecting fraud and white-collar crime

Computer Processing

and Exposures

Computer processing can increase

the risk and/or potentialdollar loss of exposures

Mechanical processing of data

Mechanical data storageComplexity of processing

Control Objectives and Transaction Cycles

Most organizations experience thesame types of economic events

These events generate transactions thatmay be grouped according to fourcommon cycles of business activity

Control Objectives and Transaction Cycles

Production

Expenditure

cycleRevenue

cycle

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 and Transaction Cycles

Vendors should be authorized in accordance

with management’s criteria.

Employees should be hired in accordance

with management’s criteria.

Access to personnel, payroll, and disbursement records should

be permitted only in accordance with management’s criteria.

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 and Transaction Cycles

The production plan should be authorized in accordance with management’s criteria.

Cost of goods manufactured should be accurately and promptly classified,

summarized, and reported.

Control Objectives and Transaction Cycles

Access to cash and securities should be permitted only in accordance with management’s criteria.

The amounts and timing of debt transactions should be authorized in accordance with

management’s criteria.

Learning Objective 2

Discuss the concept of the internal control process.

External Influences Concerning

an Entity and Internal Control

The Federal Foreign Corrupt Practices Act of

1977 (FCPA) is a specific legal requirement

that concerns many organizations

It requires all companies who are subject tothe Securities Exchange Act of 1934 to

External Influences Concerning

an Entity and Internal Control

make and keep books, records,and accounts, which in reasonabledetail, accurately and fairly reflectthe transactions and dispositions

of the assets of the issuer;

devise and maintain a system of internal

accounting controls sufficient to

External Influences Concerning

an Entity and Internal Control

1 transactions are executed in accordance

with management’s authorization;

2 transactions are recorded as necessary;

3 access to assets is permitted only inaccordance with management’s authorization;

4 the recorded accountability for assets

is compared with the existing assets

External Influences Concerning

an Entity and Internal Control

5-member Public CompanyAccounting Oversight BoardRestrictions on nonaudit services

External Influences Concerning

an Entity and Internal Control

Conflicts of interest

Corporate responsibilityfor financial reportsInsider trades during pensionfund blackout periods prohibited

External Influences Concerning

an Entity and Internal Control

Prohibition on personal loans

to executives and directors

Code of ethicsManagement assessment

Components of the Internal

Control Environment

Organizational structure

Attention and direction provided by theboard of directors and its committeesManner of assigning authority and responsibility

Human resource policies and proceduresManagement philosophy and operating style

Control Environment

Segregation of duties

SupervisionJob rotation and forced vacationWhat are other aspects of human

resources and procedures?

Risk Assessment

Risk assessment is the process ofidentifying, analyzing, and managingrisks that affect the company’s objectives

The second component of internal

control is risk assessment

Control Activities

These include accounting controls designed

to provide reasonable assurance that thefollowing control objectives are met:

The third component of internalcontrol is control activities

Control Activities

Segregation of duties

Design and use of adequatedocuments and recordsAccess to assets is permitted only inaccordance with management’s authorization

Control Activities

Independent checks and reviews are made

on the accountability of assets and performance

Information processing controls are applied

to check the proper authorization, accuracy,and completeness of individual transactions

Information and Communication

The fourth component of internal control

is information and communication

Information refers to the

organization’s accounting system

Communication relates to providing a clear

understanding regarding all policiesand procedures relating to controls

Information and Communication

What is an audit trail?

An audit trail is comprised of the documentaryevidence of the various control techniques that

a transaction was subject to during its processing

Learning Objective 3

Identify general and application

processing controls.

Transaction Processing

Controls

Transaction processing controls

Transaction Processing

Controls

The plan of data processing organization

General operating proceduresEquipment control features

Transaction Processing

Controls

Transaction Processing

Controls

Learning Objective 4

Discuss the behavioral assumptions

inherent in traditional internal

control practices.

Communicating the Objectives

Goals and Behavioral Patterns

What are some of the goals

of an information system?

ProductivityReliability of informationSafeguarding of assets

Goals and Behavioral Patterns

It is agreement or conspiracy amongtwo or more people to commit fraud

What factors may influence an individual’s

behavior in a control system?

Formal plan of organization and methods employed

Learning Objective 5

Describe the techniques used to analyze internal control systems.

Analysis of Internal Control Processes

Fulfillment of dutiesTransfer of authority

ApprovalInternal control processes routinely collectinformation concerning the following:

Analytical Techniques

The internal control questionnaire is

a common analytical techniqueused in internal control analysis

Questionnaires are essentially checklists

to ensure that a review does not omit

an area of major importance

Analytical Techniques

What are other forms of analysis?

Write-upsFlowchartsApplication control matrix

End of Chapter

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