1)

1. What is internal control? Why is internal control important in organizations? Internal control refers to the way an organization keeps its assets safe and ensures that everyone follows established organizational procedures. It also helps the organization run more efficiently and effectively. Internal control is important in a organization because without it an organization has no structure and is more prone to run into risks and problems and is not being run effectively.

2. What are the four basic purposes of internal control? Give an example of each one.

The four basic purposes are to safeguard assets, to ensure financial statement reliability, to promote operational efficiency, and to encourage compliance with management’s general and specific directives. Safeguarding your assets allow you to physically keep it in a safe location. To ensure financial statement reliability you have internal and independent auditors going through your files. When promoting operational efficiency you are allowing separation of duties so more tasks can be finished. Last but not least, internal control makes sure everyone follows the rules by writing a manual.

3. List and discuss four broad categories of organizational risk exposures. For each broad category suggest two examples.

Browns risk taxonomy lists four risk exposures in categories: Financial risk ( market, credit, and liquidity risk) referring to change in a company’s stock price, investment values, interest rates & running out of money. Operational risks (systems risk and human error risk) people making mistakes or computer errors and viruses. Strategic risk (legal and regulatory risk and business strategy risk) violating laws and poor decision making. Hazard risk (director and officers liability) officers are accused of mismanagement by not following sox act.

4. What is COSO? Why is the work of COSO important in internal control?

COSO stand for Committee of Sponsoring Organizations of the Treadway Commission on Fraudulent Financial Reporting. COSO is important to internal control because it has published documents related to enterprise risk management and internal control. Their internal control agenda has been applied to many organizations following the requirements of sox act of 2002.

5. Prepare a response to the questions for this chapters “AIS in the business world”a) What are the essential elements of an accounting information system? The essential elements

of an accounting information system are inputs, processes, outputs, storage, and internal controls.

b) How do examples of those elements change for different business?The type of source documents could be different for each business out there. Some could use manual based system vs online based systems.

c) Does the presence or absence of computers and other forms of information technology determine whether or not a business has an accounting information system? No it does not, as long as the business has an inputs being processed into outputs it can be considered to have ais system in place.

2)

1. D

2. A

3. B

4. D

5. A

6)

a. Conducting surprise cash counts.

Safeguarding assets

b. Creating a policy manual. –

promoting operating efficiency, encouraging compliance with management directives

c. Creating separate departments for purchasing inventory and receiving inventory.

Safeguarding assets and promoting operating effeciency

d. Deleting an employee’s computer account when the employee retires or is fired.

Safeguarding assets, encouraging compliance with management directives

e. Employing internal auditors.

All four purposes

f. Installing virus cleaning software on all computers.

Ensuring financial statement reliability and promoting operating efficiency

g. Locking filing cabinets with sensitive documents.

Safeguarding assets

h. Performing background checks on employees.

Safeguarding assets and promoting operating efficiency

i. Reconciling the bank statement

Safeguarding assets ensuring financial statement reliability

j. Requiring all management employees to take annual vacations.

Safeguarding assets and promoting operating efficiency.

9)

a) This company should make its inventory more secure and safe by keeping it in a safe area or having it under video surveillance. Also the company should have a zero tolerance policy on theft

b) This company needs a stronger set of separation of duties. The controller should not be able to order inventory then be able to approve invoice giving him too much power. The company should also require approval for setting up new offices.

c) Terminated employees need to be removed from the information system. The company should move onto electronic checks and payments and get rid of paper checks. Daily bank reconciliations would also improve the company.