Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 309

Internal control can safeguard assets by preventing theft, fraud, misuse, or mis-

placement. One of the most serious breaches of internal control is employee fraud.

Employee fraudis the intentional act of deceiving an employer for personal gain. Such

deception may range from purposely overstating expenses on a travel expense report

to embezzling millions of dollars through complex schemes.

Accurate information is necessary for operating a business successfully. The safe-

guarding of assets and accurate information often go hand-in-hand. The reason is that

employees attempting to defraud a business will also need to adjust the accounting

records in order to hide the fraud.

Businesses must comply with applicable laws, regulations, and financial reporting

standards. Examples of such standards and laws include environmental regulations,

contract terms, safety regulations, and generally accepted accounting principles

(GAAP).

Elements of Internal Control

How does management achieve its internal control objectives? Management is

responsible for designing and applying five elements of internal controlto meet the

three internal control objectives. These elements are (1) the control environment,

(2) risk assessment, (3) control procedures, (4) monitoring, and (5) information and

communication.^5

The elements of internal control are illustrated in Exhibit 2. In this exhibit, these

elements form an umbrella over the business to protect it from control threats. The

5 Ibid., 12–14.

Control Threats

Business

Management

Control

Procedure

Control

Environment

Risk Assessment

Information and

Communication

Monitoring

Exhibit 2

Elements of Internal
Control