CHAPTER 7

• Automated controls


  Controls that are built into computer programs and systems intended to ensure system integrity, reliability, and security
• Audit committee


  Committee of the board of directors tasked to perform oversight of internal controls, financial reporting, and audit processes within an organization
• Compliance audits


  Examinations intended to determine whether the company or any of its department is able to adhere to prevailing laws and regulations
• Corruption


  Type of fraud that encompasses bribery, illegal kickbacks, under-the-table schemes, and the like
• Deficiency in Design


  A critical control is not properly designed and does not meet the control objective; or is simply ineffective
• Deficiency in Operations


  A critical control is designed properly but does not perform in the intended manner and is unable to address the identified risks
• Detective controls


  Controls that serve as second line of defense when fraud, error, or noncompliance was able to penetrate preventive controls
• Entity-level controls


  Controls that are applied broadly at the company level and essentially affects the entire corporate culture as well as the functioning of transaction-level controls
• External auditors


  CPAs and CPA firms who render independent audit of the reliability of financial statements
• Fraud


  An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage
• Fraud triangle


  Tool used in identifying red flags or indicators of fraud, broken into (1) pressures to commit fraud, (2) opportunities to commit fraud, and (3) rationalizations
• Fraudulent financial reporting


  Type of fraud that results to manipulation of financial statements for the purpose of showing superior managerial performance or profitability when in fact the company performed poorly
• Hard controls


  Controls that have tangible or physical characteristics
• Internal audit


  Independent and objective assurance activity within an organization intended to provide audit service in the areas of operations, reporting, compliance, and finance
• Misappropriation of assets


  Type of fraud characterized by theft of company asset, fund, or resource
• Noncompliance


  Acts of company personnel, whether intentional or not, that are contrary to prevailing laws and regulations
• Operational audits


  Examinations intended to ascertain whether management has conducted business operations effectively and efficiently
• Preventive controls


  First line of defense controls intended to avert the happening of negative events such as fraud, error, or noncompliance
• Soft controls

  Controls that do not have physical characteristics
• Tests of controls


  Procedures of auditors intended to determine whether internal controls are operating effectively or not
• Transaction-level controls


  Internal control procedures deployed and implemented for every major transaction and accounts of the company
• Certified Internal Auditors (CIA)


  An advanced certification although not a mandatory requirement for one to be an internal auditor
• Corporate charter


  identifying the roles of the BOD and committees such as audit committee and risk oversight committee
• Association of Certified Fraud Examiners


  ACFE; categorizes fraud into three
• Pressures to commit fraud


  What drives people to commit fraud?
• Opportunities


  element of fraud triangle; when there are no internal controls nor an audit process
• Rationalization


  an element of fraud triangle that relies belief system or attitude of the people in the company
• Control Deficiency


  is a missing control, or an existing control that is not designed properly, or is properly designed but is not operating effectively
• Financial Audits


  examinations focused on determining whether the company's finance function as well as financial reports are accurate or reliable