Transaction Processing and the Internal Control Process Chapter  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–1 Learning Objective Understand the nature of control exposures  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–2 Controls and Exposures Controls are needed to reduce exposures An exposure consists of the potential financial effect of an event multiplied by its probability of occurrence Controls rarely affect the causes of exposures  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–3 Common Exposures Excessive costs Business interruption Inaccurate accounting Deficient revenues EXPOSURES Fraud and embezzlement Loss of assets Statutory sanctions Competitive disadvantages  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–4 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 fictitious transactions into an accounting system  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–5 Fraud and White-Collar Crime Employee theft Employee-outsider theft Management fraud  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–6 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 rather than the individuals who perpetrate the fraud  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–7 Fraud and White-Collar Crime What is forensic accounting? Forensic accounting is one of several terms used to describe the activities of persons who are concerned with preventing and detecting fraud and white-collar crime  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–8 Computer Processing and Exposures Computer processing can increase the risk and/or potential dollar loss of exposures Mechanical processing of data Mechanical data storage Complexity of processing  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4–9 Control Objectives and Transaction Cycles Most organizations experience the same types of economic events These events generate transactions that may be grouped according to four common cycles of business activity  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Monitoring The fifth component of internal control is monitoring It involves the ongoing process of assessing the quality of internal controls over time and taking corrective actions when necessary  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Learning Objective Identify general and application processing controls  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Transaction Processing Controls Transaction processing controls General controls Application controls  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Transaction Processing Controls The plan of data processing organization General operating procedures Equipment control features Equipment and data-access controls  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Transaction Processing Controls Input Processing Output  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Transaction Processing Controls Preventative Detective Corrective  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Learning Objective Discuss the behavioral assumptions inherent in traditional internal control practices  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Communicating the Objectives of Internal Control The principal function of internal control is to influence the behavior of people in a business system  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Goals and Behavioral Patterns What are some of the goals of an information system? Productivity Reliability of information Safeguarding of assets  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Goals and Behavioral Patterns It is agreement or conspiracy among two 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 Groups and informal pressure  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Learning Objective Describe the techniques used to analyze internal control systems  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Analysis of Internal Control Processes Internal control processes routinely collect information concerning the following: Fulfillment of duties Transfer of authority Approval Verification  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Analytical Techniques The internal control questionnaire is a common analytical technique used in internal control analysis Questionnaires are essentially checklists to ensure that a review does not omit an area of major importance  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– Analytical Techniques What are other forms of analysis? Write-ups Flowcharts Application control matrix  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood 4– End of Chapter  2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood – 47 ... the entry of fictitious transactions into an accounting system  2 004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/ Hopwood 4–5 Fraud and White-Collar Crime Employee... 2 004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/ Hopwood 4– Control Objectives and Transaction Cycles Customers should be authorized in accordance with management’s... accurately and promptly classified, summarized, and reported  2 004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/ Hopwood 4– Control Objectives and Transaction