Chapter 5
 TRANSACTION
PROCESSING AND
INTERNAL CONTROL PROCESS
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Controls and Exposures
 Controls
Bodnar/Hopwood AIS 7th Ed
are needed to reduce exposures.
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Control and Exposure
 An
exposure consists of the potential
financial effect of an event multiplied by its
probability of occurrence.
 Controls rarely affect the causes of
exposures.
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Common Exposures
Excessive
Costs
Deficient
Revenue
EXPOSURES
Loss of
Assets
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Inaccurate
Accounting
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Common Exposures
Business
Interruption
Statutory
Sanctions
EXPOSURES
Competitive
Disadvantages
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Fraud and
Embezzlement
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White-collar Crime
a
grouping of illegal activities that are
differentiated from other illegal activities in
that they occur as part of the occupation of
the offender
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Fraud and White-Collar Crime
 What
1
2
3
are the three basic forms of theft in
white-collar crime?
Employee theft
Employee-outsider theft
Management fraud
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Fraudulent Financial Reporting
 intentional
or reckless conduct, whether by
purposeful act or omission, that results in
materially misleading financial statements
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Corporate Crime
 white-collar
crime that benefits a company
or organization, rather than the individuals
who perpetrate the fraud
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Forensic Accounting
 one
of several terms which is used to
describe the activities of persons who are
concerned with preventing and detecting
fraud
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The National Association of
Certified Fraud Examiners
 provides
bona fide qualifications for
Certified Fraud Examiners through
administration of the Uniform CFE
Examination
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Seriousness of Fraud
 More
than 75% respondents in survey
experienced fraud during the past year, with
23% reporting losses of $1,000,000 or
more.
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Computer Processing and
Exposures
 Many
aspects of computer processing tend
to significantly increase an organization's
exposure to undesirable events.
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Control Objectives and
Transaction Cycles
 Each
transaction cycle will have exposures.
 Management should develop detailed
control objectives for each transaction
cycle.
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Control Objectives and
Transaction Cycles
Control Objectives: Revenue Cycle
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.
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Control Objectives and
Transaction Cycles
Control Objectives: Expenditure Cycle
Compensation rates and payroll deductions
should be authorized in accordance with
management’s criteria.
Amounts due to vendors should be accurately and
promptly classified, summarized, and reported.
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Internal Control
 Internal
control is a process effected by an
entity’s board of directors, management,
and other personnel--designed to provide
reasonable assurance regarding the
achievement of objectives in the following
categories:
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Internal Control
 a)
reliability of financial reporting,
 b) effectiveness and efficiency of
operations, and
 c) compliance with applicable laws and
regulations
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Internal Control Process
 the
control environment
 risk assessment
 control activities
 information and communication
 monitoring
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Major Premises
 responsibility:
management is responsible
 reasonable assurance: relative costs and
benefits
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The Federal Foreign Corrupt
Practices Act of 1977 (FCPA)
 requires
all companies subject to the
Securities Exchange Act of 1934 to
 make and keep books, records, and
accounts, ...
 devise and maintain a system of internal
accounting controls sufficient to provide
reasonable assurances
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Control Environment
 the
collective effect of various factors on
establishing, enhancing, or mitigating the
effectiveness of specific policies and
procedures
 sets the overall tone
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Control Environment Factors
 management
philosophy and operating style
 organizational structure
 board of directors and its committees
 human resource policies and procedures
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Risk Assessment
 the
process of identifying, analyzing, and
managing risks that affect the company’s
objectives
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Control Activities
 The
policies and procedures established to
help ensure that management directives are
carried out.
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Potential Control Activities
 segregation
of duties
 proper forms for recording of transactions
 restricted access to assets
 authorization
 independent checks
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Information and Communication
 refers
to the organization's accounting
system, which consists of the methods and
records established to identify, assemble,
analyze, classify, record, and report the
organization's transactions and to maintain
accountability for the related assets and
liabilities
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Documentation of the Accounting
System
 Accounting
procedures should be set forth
in accounting procedure manuals so that
policies and instructions may be explicitly
known and uniformly applied.
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Audit Trail
 An
audit trail exists if a financial total that
appears in a general ledger account can be
supported by evidence concerning all the
individual transactions that comprise that
total and vice versa.
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Monitoring
 involves
the ongoing process of assessing
the quality of internal controls over time
and taking corrective actions when
necessary
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Internal Audit
 An
internal audit function is common in
large organizations to monitor and evaluate
controls on an ongoing basis.
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Transaction Processing Controls
 General
controls affect all transaction
processing.
 Application controls are specific to
individual applications.
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General Controls
 plan
of data processing organization
 general operating procedures
 equipment control features
 equipment and data-access controls
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Types of Controls
 Preventative
controls act to prevent errors
and fraud before they happen.
 Detective controls act to uncover errors and
fraud after they have occurred.
 Corrective controls act to correct errors.
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Communicating the Objectives of
Internal Control
 The
system must be designed such that each
employee is convinced that controls are
meant to prevent difficulties or crises in the
operation of the organization that could
otherwise affect him or her very personally.
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Analytical Techniques
 internal
control questionnaire
 application controls matrix
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