Chapter 5

 TRANSACTION PROCESSING AND

INTERNAL CONTROL PROCESS

Bodnar/Hopwood AIS 7th Ed 1

 Controls and Exposures
 Controls are needed to reduce exposures.

Bodnar/Hopwood AIS 7th Ed 2

 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.

Bodnar/Hopwood AIS 7th Ed 3

 Common Exposures

Excessive Deficient
Costs Revenue

EXPOSURES

Loss of Inaccurate
Assets Accounting

Bodnar/Hopwood AIS 7th Ed 4

 Common Exposures

Business Statutory
Interruption Sanctions

EXPOSURES

Competitive Fraud and

Disadvantages Embezzlement

Bodnar/Hopwood AIS 7th Ed 5

 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

Bodnar/Hopwood AIS 7th Ed 6

 Fraud and White-Collar Crime
 What are the three basic forms of theft in
white-collar crime?
1 Employee theft
2 Employee-outsider theft
3 Management fraud

Bodnar/Hopwood AIS 7th Ed 7

 Fraudulent Financial Reporting
 intentional or reckless conduct, whether by
purposeful act or omission, that results in
materially misleading financial statements

Bodnar/Hopwood AIS 7th Ed 8

 Corporate Crime
 white-collar crime that benefits a company
or organization, rather than the individuals
who perpetrate the fraud

Bodnar/Hopwood AIS 7th Ed 9

 Forensic Accounting
 one of several terms which is used to
describe the activities of persons who are
concerned with preventing and detecting
fraud

Bodnar/Hopwood AIS 7th Ed 10

 The National Association of
Certified Fraud Examiners
 provides bona fide qualifications for
Certified Fraud Examiners through
administration of the Uniform CFE
Examination

Bodnar/Hopwood AIS 7th Ed 11

 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.

Bodnar/Hopwood AIS 7th Ed 12

 Computer Processing and
Exposures
 Many aspects of computer processing tend
to significantly increase an organization's
exposure to undesirable events.

Bodnar/Hopwood AIS 7th Ed 13

 Control Objectives and
Transaction Cycles
 Each transaction cycle will have exposures.
 Management should develop detailed
control objectives for each transaction
cycle.

Bodnar/Hopwood AIS 7th Ed 14

 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.
Bodnar/Hopwood AIS 7th Ed 15
 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.

Bodnar/Hopwood AIS 7th Ed 16

 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

Bodnar/Hopwood AIS 7th Ed 18

 Internal Control Process
 the control environment
 risk assessment
 control activities
 information and communication
 monitoring

Bodnar/Hopwood AIS 7th Ed 19

 Major Premises
 responsibility:
management is responsible
 reasonable assurance: relative costs and
benefits

Bodnar/Hopwood AIS 7th Ed 20

 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

Bodnar/Hopwood AIS 7th Ed 21

 Control Environment
 the collective effect of various factors on
establishing, enhancing, or mitigating the
effectiveness of specific policies and
procedures
 sets the overall tone

Bodnar/Hopwood AIS 7th Ed 22

 Control Environment Factors
 management philosophy and operating style
 organizational structure
 board of directors and its committees
 human resource policies and procedures

Bodnar/Hopwood AIS 7th Ed 23

 Risk Assessment
 the process of identifying, analyzing, and
managing risks that affect the company’s
objectives

Bodnar/Hopwood AIS 7th Ed 24

 Control Activities
 The policies and procedures established to
help ensure that management directives are
carried out.

Bodnar/Hopwood AIS 7th Ed 25

 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.

Bodnar/Hopwood AIS 7th Ed 32

 General Controls
 planof 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.

Bodnar/Hopwood AIS 7th Ed 34

 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
 internalcontrol questionnaire
 application controls matrix

Bodnar/Hopwood AIS 7th Ed 36