Accounting Information System Ch. 3
Chapter 3 – Ethics, Fraud, and Internal Control
Fraud
1. Compare and contrast employee fraud vs. management fraud.
a. Employee Fraud
a. Nonmanagement employees convert cash or assets to direct employee benefit
b. Management Fraud – Performance Fraud
a. Does not involve direct theft of assets
b. Fraud is perpetrated above which the internal control structure generally relate
c. Use financial statements to create an illusion that an entity is healthier than it is
d. Misappropriation of assets
e. Taking advantage of position to manipulate earnings
2. What factors contribute to fraud? How can a company minimize the occurrence of these factors? Explain
3. Explain the key provisions of sections 302, 404 and 406 of the Sarbanes-Oxley act?
CoSo Framework (SAS 78)
a. Sec. 406 – Establishes a code of Ethics for the company
a. Requires public companies to disclose if they have accepted a code of ethics that applies to CEO, CFO, controller or persons performing similar functions
b. If they have not accepted one, must explain why not
b. Sec. 302
a. Require corporate management to certify IC quarterly and annually
c. Sec. 404
a. Requires management to access the effectiveness of IC
b. Auditors are required issue an attest report on management’s assessment
d. SAS 109 pg. 113 – Audit Planning – Control Environment
a. Requires auditors obtain sufficient knowledge to assess the attitude and awareness of the organizations management
b. Audit planning
c. How do you know they are effective – Corporate governance code pg. 13
i. Board of directors should adopt provisions of SOX ii. Separate CEO and chairman – no role duality iii. Establish independent Audit committee iv. Compensation committee
v. Nomination Committee
1. Nominate independent directors
e. SAS 78 = COSO framework (FILL OUT)
f. SAS 99
4. Explain the following terms:
Lapping
i. Take customer A’s check, use Customer B’s to credit Customer A, use Customer C’s check to
Fraud
1. Compare and contrast employee fraud vs. management fraud.
a. Employee Fraud
a. Nonmanagement employees convert cash or assets to direct employee benefit
b. Management Fraud – Performance Fraud
a. Does not involve direct theft of assets
b. Fraud is perpetrated above which the internal control structure generally relate
c. Use financial statements to create an illusion that an entity is healthier than it is
d. Misappropriation of assets
e. Taking advantage of position to manipulate earnings
2. What factors contribute to fraud? How can a company minimize the occurrence of these factors? Explain
3. Explain the key provisions of sections 302, 404 and 406 of the Sarbanes-Oxley act?
CoSo Framework (SAS 78)
a. Sec. 406 – Establishes a code of Ethics for the company
a. Requires public companies to disclose if they have accepted a code of ethics that applies to CEO, CFO, controller or persons performing similar functions
b. If they have not accepted one, must explain why not
b. Sec. 302
a. Require corporate management to certify IC quarterly and annually
c. Sec. 404
a. Requires management to access the effectiveness of IC
b. Auditors are required issue an attest report on management’s assessment
d. SAS 109 pg. 113 – Audit Planning – Control Environment
a. Requires auditors obtain sufficient knowledge to assess the attitude and awareness of the organizations management
b. Audit planning
c. How do you know they are effective – Corporate governance code pg. 13
i. Board of directors should adopt provisions of SOX ii. Separate CEO and chairman – no role duality iii. Establish independent Audit committee iv. Compensation committee
v. Nomination Committee
1. Nominate independent directors
e. SAS 78 = COSO framework (FILL OUT)
f. SAS 99
4. Explain the following terms:
Lapping
i. Take customer A’s check, use Customer B’s to credit Customer A, use Customer C’s check to