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Chapter 6-1
Ethical Behavior
a) Develop written codes of ethics. ) p b) Communicate code to all members. c) Ensure top management models ethical behavior. d) Establish method to report violations anonymously. e) Enforce ethics codes.
Chapter 6-2
Fraud
Use f d U of deception or trickery f personal gain i i k for l i One f fastest On of f st st growing c im s in the U S in crimes th U.S.
Chapter 6-3
Management Fraud
Fraud Cases
Chapter 6-5
Fraud Cases
Chapter 6-6
Employee Embezzlement
Steal cash and other assets Establish fake companies and intercept payment Engage in disbursement schemes:
Chapter 6-7
From suppliers pp For ignoring higher purchase prices charged to employer For ignoring delivery of inferior goods For authorizing payment for goods never delivered From customers For granting a lower sales price For giving goods and services for which employer is g gg p y never paid
Chapter 6-8
Fraud Triangle
Perceived Opportunity
Perceived Pressure
Chapter 6-9
Rationalization
Perceived Pressure
Financial pressure G Greed d Addictions P Poor credit rating or money management d Work pressure Dissatisfaction with pay Overlooked for promotion
Chapter 6-10
Rationalization
Employees who commit fraud justify actions I will pay it back. p y I deserve a raise.
Chapter 6-11
Perceived Opportunity
Easy access to assets or assets poorly accounted for Businesses have most influence over this element of fraud triangle Can be reduced through a good system of internal control t l
Chapter 6-12
Internal Control
Chapter 6-13
Chapter 6-14
Control environment
Foundation for all other components of intern control Factors include: Leadership philosophy & operating style Competency of employees Integrity and values of employees Delegation of authority and responsibility
Chapter 6-15
Risk Assessment
Chapter 6-16
Control Activities
Employment of competent personnel Separation of duties Authorizing transactions h Maintaining custody of assets Keeping accounting records Mandatory vacations
Chapter 6-17
Control Activities
Restricted access R i d Security measures Proper authorization Adequate documents and records
Chapter 6-18
Chapter 6-19
Monitoring
Internal control system needs to be continually monitored to locate weaknesses Can be accomplished through: Ongoing activities Separate evaluations
Chapter 6-20
Chapter 6-21
Audits
E am nat on Examination of companys financial statements and company s f nanc a stat m nts an accounting systems Internal audits Conducted by companys employees y p y p y External audits Performed by Certified Public Accountants (CPAs) Outcome is issuance of opinion
Chapter 6-22
Audit Opinions
Type of opinion T f i i Unqualified (Clean) Reason supporting opinion R i i i Financial statements fairly presented Free from material misstatements Prepared in accordance with GAAP Auditors do not agree with a specific accounting application OR Auditors unable to gather all the information necessary OR Auditors unable to determine Auditors outcome of an uncertainty Impact of opinion I f i i Best type of opinion Users can rely upon financial statements
Opinion report includes separate paragraph explaining the qualification Helps users make more informed decisions about the company Brings attention to situation that may affect users decisions
Chapter 6-23
Audit Opinions
Type of opinion Adverse Reason supporting opinion Financial statements not fairly presented OR Material misstatements in financial statements Impact of opinion Opinion report has explanatory paragraph Very detrimental to company Informs users financial statements cannot be relied t t t tb li d upon Users must give considerable thought to investing
Disclaimer
Auditors unable to express opinion on financial statements because of: Lack of auditor independence Inability to obtain evidence I bilit t bt i id Going concern issues Material uncertainties
Chapter 6-24
Corporate Governance
Chapter 6-25
Applies to publicly-traded companies publiclyEstablished the Public Company Accounting Oversight Board Requires external auditors report to audit committee Requires that companys CEO and CFO certify filed financial reports
Chapter 6-26
Executive Certification
Have reviewed report Report d s not contain any materially f ls R t does t t i t i ll false statements Financial statements fairly present financial condition and results of operations Signing officers are responsible for internal controls and have evaluated them
Chapter 6-27
Executive Certification
List of all internal control deficiencies Information on employee fraud Significant changes in internal control Factors that could have a negative impact on internal controls i l l
Chapter 6-28
International Financial Reporting Standards (IFRS) p g developed in 1970s Currently used by over half the countries in the world U.S. is considering a switch to IFRS
Chapter 6-29
Members from around the world Goal is to create a set of global, high-quality, highenforceable accounting standards Standards St d d are a principle-b principle-based system i i l d t As opposed to a rule-based system ruleMany differences exist between U.S. GAAP and International Standards
Chapter 6-30