6-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...
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Transcript of 6-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...
6-1
PowerPoint Presentation by PowerPoint Presentation by Douglas CloudDouglas Cloud
Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson,
the Star Logo, and South-Western are trademarks used herein under license.
Task Force Image Gallery clip art included in this electronic presentation is used with the
permission of NVTech Inc.
Task Force Image Gallery clip art included in this electronic presentation is used with the
permission of NVTech Inc.
F1366Full and Full and Fair Fair ReportingReporting
Financial AccountingA Bridge to Decision MakingA Bridge to Decision Making
Ingram and Albright
6th edition
6-2
ObjectivesObjectivesObjectivesObjectives
Once you have completed this chapter, you should be able to—
Once you have completed this chapter, you should be able to—
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2. Describe how accounting standards are established in the United States.
3. Explain the purpose of the Financial Accounting Standards Board’s conceptual framework.
ObjectivesObjectivesObjectivesObjectives
ContinuedContinuedContinuedContinued
1. Explain the purpose of accounting regulation.
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4. Identify supplementary information to the financial statements in a corporate annual report.
ObjectivesObjectivesObjectivesObjectives
5. Describe the purpose of internal controls and types of controls that should be evident in business organizations.
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11ObjectiveObjectiveObjectiveObjective
Explain the purpose of accounting regulation.
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Accounting regulations protect the interests of external decision makers by ensuring that:
The Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting Regulations
1) Information for evaluating the performance and financial condition of a business is available and
2) That the information is prepared according to specific guidelines.
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These specific guidelines provide assurance that the information is reliable and comparable over time and
across companies.
These specific guidelines provide assurance that the information is reliable and comparable over time and
across companies.
The Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting Regulations
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The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a
legitimate business.
The purchaser of a corporation’s stock needs assurance that the shares are reasonably priced and represent a
legitimate business.
The Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting Regulations
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To insure access to capital markets, the SEC requires corporations to
prepare accounting information in conformity with generally accepted
accounting principles (GAAP).
To insure access to capital markets, the SEC requires corporations to
prepare accounting information in conformity with generally accepted
accounting principles (GAAP).
The Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting RegulationsThe Purpose of Accounting Regulations
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The Securities Act of 1933 requires
most corporations to file registration statements before selling stock to
investors.
The Securities Act of 1933 requires
most corporations to file registration statements before selling stock to
investors.
Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
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The Securities Exchange Act of
1934 requires corporations to provide annual
financial reports to stockholders.
The Securities Exchange Act of
1934 requires corporations to provide annual
financial reports to stockholders.
Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
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The 1934 act also created the Securities and
Exchange Commission (SEC). The SEC is
responsible for overseeing external financial reporting
for publicly traded corporations.
The 1934 act also created the Securities and
Exchange Commission (SEC). The SEC is
responsible for overseeing external financial reporting
for publicly traded corporations.
Securities and Securities and Exchange Exchange
CommissionCommission
Securities and Securities and Exchange Exchange
CommissionCommission
Securities and Exchange
Commission
Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002. This act, along with
subsequent regulations, affected the responsibilities of auditors, boards of
directors, and corporate managers with respect to financial reporting.
The Sarbanes-Oxley Act (SOX) was passed by Congress in 2002. This act, along with
subsequent regulations, affected the responsibilities of auditors, boards of
directors, and corporate managers with respect to financial reporting.
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
The primary purpose of SOX was to increase investor
confidence in the financial reports provided by
corporations.
The primary purpose of SOX was to increase investor
confidence in the financial reports provided by
corporations.
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
Further, SOX increased the responsibilities of corporate managers for producing reliable financial reports
and specified restrictions on the activities of auditors to increase their independence from the audit clients.
Further, SOX increased the responsibilities of corporate managers for producing reliable financial reports
and specified restrictions on the activities of auditors to increase their independence from the audit clients.
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The Public Companies Accounting Oversight Board is responsible for
oversight of financial statement audits of publicly-traded corporations and the
establishment of auditing standards in the United States.
Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
The PCAOB reports to the Securities and Exchange
Commission (SEC), which appoints members to the five-
member PCAOB board.
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
SOX requires a certification from the chief executive officer and
chief financial officer along with the firm’s financial reports.
SOX requires a certification from the chief executive officer and
chief financial officer along with the firm’s financial reports.
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
The officers certify that the financial reports comply with requirements of Securities Exchange Act of 1934 and
contain information that fairly presents, in all material respects, the
financial condition and results of operations of the issuer.
The officers certify that the financial reports comply with requirements of Securities Exchange Act of 1934 and
contain information that fairly presents, in all material respects, the
financial condition and results of operations of the issuer.
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
SOX prohibits external auditors from providing
certain services to a client corporation.
SOX prohibits external auditors from providing
certain services to a client corporation.
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations
• bookkeeping or other services relating to accounting records or financial statements of the audit client
• financial information systems design and implementation
• appraisal or evaluation services, fairness opinions or contribution-in-kind reports
• actuarial services
These prohibitions include:
ContinuedContinuedContinuedContinued
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Sources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting RegulationsSources of Accounting Regulations• internal audit outsourcing services• management functions or human resources• broker or dealer, investment advisor, or
investment banking services• legal services and expert services unrelated to
the audit• any other service that the accounting board
(PCAOB) determines, by regulation, is impermissible
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22Describe how accounting standards are established in the United States.
ObjectiveObjectiveObjectiveObjective
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Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations
The Financial Accounting Standards Board (FASB) has been the primary organization for setting
accounting standards for businesses in the U.S. since 1973.
The Financial Accounting Standards Board (FASB) has been the primary organization for setting
accounting standards for businesses in the U.S. since 1973.
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The Governmental Accounting Standards Board (GASB) sets
accounting standards for state and local governmental units.
The Governmental Accounting Standards Board (GASB) sets
accounting standards for state and local governmental units.
Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations
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Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations
The General Accounting Office is the primary federal government agency
that oversees accounting in the
federal government.
The General Accounting Office is the primary federal government agency
that oversees accounting in the
federal government.
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Standard Setting OrganizationsStandard Setting OrganizationsStandard Setting OrganizationsStandard Setting Organizations
The International Accounting Standards Board (IASB) is an independent, privately-funded
accounting standard setter. The Board is committed to developing, in the public
interest, a single set of high quality, understandable, and enforceable global
accounting standards.
The International Accounting Standards Board (IASB) is an independent, privately-funded
accounting standard setter. The Board is committed to developing, in the public
interest, a single set of high quality, understandable, and enforceable global
accounting standards.
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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process1. Accounting issues are identified and evaluated for
consideration.
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The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
2. A discussion memorandum is issued and responses are solicited.
1. Accounting issues are identified and evaluated for consideration.
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1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
A discussion memorandum is a document that identifies accounting issues and alternative approaches to
resolving the issue.
A discussion memorandum is a document that identifies accounting issues and alternative approaches to
resolving the issue.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
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3. Public hearings are held.
1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
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3. Public hearings are held.4. An exposure draft is issued and responses are
solicited.
1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
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3. Public hearings are held.4. An exposure draft is issued and responses are
solicited.
1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
An exposure draft is a document that describes a proposed accounting standard.
An exposure draft is a document that describes a proposed accounting standard.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
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3. Public hearings are held.4. An exposure draft is issued and responses are
solicited.
1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
5. Additional public hearings are held as needed.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
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3. Public hearings are held.4. An exposure draft is issued and responses are
solicited.
1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
5. Additional public hearings are held as needed.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
An accounting standard is an official pronouncement establishing acceptable accounting
procedures or financial report content.
An accounting standard is an official pronouncement establishing acceptable accounting
procedures or financial report content.
6. A standard is issued.
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7. Existing standards are reviewed and modified as needed.
6. A standard is issued.
3. Public hearings are held.4. An exposure draft is issued and responses are
solicited.
1. Accounting issues are identified and evaluated for consideration.
2. A discussion memorandum is issued and responses are solicited.
5. Additional public hearings are held as needed.
The Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting ProcessThe Standard-Setting Process
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Exercise 6-4Exercise 6-4Exercise 6-4Exercise 6-4
Click button to skip exercise.
Identify the following:
a. The private sector organization currently responsible for setting financial accounting standards in the United States.
Press “Enter” or left click the mouse for the solution.
FASB
If you experience trouble making the button work, type 41 and press “Enter.”
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Exercise 6-4Exercise 6-4Exercise 6-4Exercise 6-4
Identify the following:
b. The private sector organization currently responsible for setting state and local governmental accounting standards in the United States.
GASB
Press “Enter” or left click the mouse for the solution.
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Exercise 6-4Exercise 6-4Exercise 6-4Exercise 6-4
Identify the following:
c. The organization that exists to influence the development of international accounting standards.
IASB
Press “Enter” or left click the mouse for the solution.
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Identify the following:d. The federal agency that oversees
accounting at the federal government.GAO
Exercise 6-4Exercise 6-4Exercise 6-4Exercise 6-4
e. The organization responsible for the enforcement of financial accounting standards in the United States.
SECPress “Enter” or left click the mouse for the solution.
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33Explain the purpose of the Financial Accounting Standards Board’s conceptual framework.
ObjectiveObjectiveObjectiveObjective
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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework
The FASB conceptual framework is a set of objectives, principles, and
definitions to guide the development of new accounting standards.
The FASB conceptual framework is a set of objectives, principles, and
definitions to guide the development of new accounting standards.
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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework
The FASB conceptual framework includes The FASB conceptual framework includes four major components:four major components:
1. Objectives of financial reporting2. Qualitative characteristics of accounting
information3. Elements of financial statements4. Recognition and measurement in
financial statements
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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework
To be relevant, information should be timely and have
predictive or feedback value.
To be relevant, information should be timely and have
predictive or feedback value.
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The FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual FrameworkThe FASB’s Conceptual Framework
To be reliable, information should faithfully represent
economic events and should be verifiable and neutral.
To be reliable, information should faithfully represent
economic events and should be verifiable and neutral.
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44Identify supplementary information to the financial statements in a corporate annual report.
ObjectiveObjectiveObjectiveObjective
6-47
Corporate annual reports Corporate annual reports usually include:usually include:
Corporate annual reports Corporate annual reports usually include:usually include:
a letter from the president or chief executive officer of the company
a description of the company’s products and business activities
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Corporate annual reports Corporate annual reports usually include:usually include:
Corporate annual reports Corporate annual reports usually include:usually include:
a summary of selected business data
Financial data, such as financial statements for a number of years
Financial data, such as financial statements for a number of years
An example of such data is shown in the next slide.
An example of such data is shown in the next slide.
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Summary Business
Data from a Corporate
Report
2002 2003 2004 2005 2006
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Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
a discussion by management of the company’s performance
This section, known as management’s discussion and analysis (MD&A) explains important events
and changes in performance during the years presented in the financial statements.
This section, known as management’s discussion and analysis (MD&A) explains important events
and changes in performance during the years presented in the financial statements.
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Typical issues considered in the MD&A include the following: a comparison of operating results among
the data provided in the company’s income statement
liquidity and cash flows as indicated by cash and short-term investments and the statement of cash flows
major business risks
ContinuedContinuedContinuedContinued
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Typical issues considered in the MD&A include the following: financial risks such as foreign currency
exchange rates, equity security prices, and interest rate changes on debt securities
changes in accounting methods used by the company
subsequent events
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Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
financial statements
Notes to financial statements describe how some of the numbers were computed and
provide additional information about items reported in the statements.
Notes to financial statements describe how some of the numbers were computed and
provide additional information about items reported in the statements.
notes to the financial statements
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a statement of management responsibilities for the financial statements
Management is responsible for preparing statements and related information that fairly reports the
business activities of a corporation.
Management is responsible for preparing statements and related information that fairly reports the
business activities of a corporation.
Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
6-55
an audit report
An audit involves a detailed, systematic investigation of a company’s accounting records and procedures for the purpose of
determining the reliability of financial reports.
An audit involves a detailed, systematic investigation of a company’s accounting records and procedures for the purpose of
determining the reliability of financial reports.
Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
Corporate Annual Reports Corporate Annual Reports Usually Include:Usually Include:
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Attestation occurs when an auditor affirms the fairness of financial
statements and other information. It provides public notice of the auditors’
belief about the fairness of the accompanying financial information.
Attestation occurs when an auditor affirms the fairness of financial
statements and other information. It provides public notice of the auditors’
belief about the fairness of the accompanying financial information.
The Auditors’ ReportThe Auditors’ ReportThe Auditors’ ReportThe Auditors’ Report
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An unqualified opinion states that the auditor believes that the
financial statements fairly present the company’s actual economic events for the period covered by
the audited statements.
An unqualified opinion states that the auditor believes that the
financial statements fairly present the company’s actual economic events for the period covered by
the audited statements.
The Auditors’ ReportThe Auditors’ ReportThe Auditors’ ReportThe Auditors’ Report
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Auditing standards include procedures used in conducting an
audit to help auditors form an opinion about the fairness of the
audited statements.
Auditing standards include procedures used in conducting an
audit to help auditors form an opinion about the fairness of the
audited statements.
The Auditors’ ReportThe Auditors’ ReportThe Auditors’ ReportThe Auditors’ Report
6-59
Exercise 6-12Exercise 6-12Exercise 6-12Exercise 6-12
Click button to skip exercise.
Quick Transport Company owns a large fleet of trucks that move freight throughout the country. Some of these trucks cost hundreds of thousands of dollars and are operated for 15 years or more before being replaced. The company issues long-term debt to pay for most of its equipment.
ContinuedContinuedContinuedContinued
If you experience trouble making the button work, type 63 and press “Enter.”
6-60
Exercise 6-12Exercise 6-12Exercise 6-12Exercise 6-12
The company’s fiscal year ends on June 30. For each fiscal year, the company prepares financial reports that include estimates of its results of operations for the year. How do the operations of Quick illustrate the periodic measurement and going concern principles of accounting?
Press “Enter” or left click the mouse for the solution.
6-61
Quick uses periodic measurements because decision makers cannot wait until all transactions of the company are completed before making decisions. The periodic measurements include estimates because all transactions of the company have not been completed at the end of the fiscal period.
Quick uses periodic measurements because decision makers cannot wait until all transactions of the company are completed before making decisions. The periodic measurements include estimates because all transactions of the company have not been completed at the end of the fiscal period.
Exercise 6-12Exercise 6-12Exercise 6-12Exercise 6-12
ContinuedContinuedContinuedContinued
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Quick is a going concern because it has an indefinite life. This life is sufficiently long that it can engage in long-term transactions, such as issuing long-term debt and purchasing long-term assets. It expects to continue in business to use these assets and repay the debt. It measures its performance periodically to provide information to decision makers.
Quick is a going concern because it has an indefinite life. This life is sufficiently long that it can engage in long-term transactions, such as issuing long-term debt and purchasing long-term assets. It expects to continue in business to use these assets and repay the debt. It measures its performance periodically to provide information to decision makers.
Exercise 6-12Exercise 6-12Exercise 6-12Exercise 6-12
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55Describe the purpose of internal controls and types of controls that should be evident in business organizations.
ObjectiveObjectiveObjectiveObjective
6-64
Management PhilosophyManagement PhilosophyManagement PhilosophyManagement Philosophy
A strong system of internal controls begins with a
management philosophy that encourages appropriate security
and behavior in a company.
A strong system of internal controls begins with a
management philosophy that encourages appropriate security
and behavior in a company.
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Management PhilosophyManagement PhilosophyManagement PhilosophyManagement Philosophy
Top management ensure that procedures are
developed to monitor and enforce control policies.
Top management ensure that procedures are
developed to monitor and enforce control policies.
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CCoonndduuc c tt
CCooddee
Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics
Management should create a code of ethics and other documents
that establish company policy and inform
employees of acceptable and expected behavior.
Management should create a code of ethics and other documents
that establish company policy and inform
employees of acceptable and expected behavior.
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Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics
A major purpose of internal controls is to
ensure compliance with laws and regulations.
A major purpose of internal controls is to
ensure compliance with laws and regulations.
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Computer System ControlsComputer System ControlsComputer System ControlsComputer System Controls
Internal controls should be built into computer information systems to protect a company’s information
resources from unauthorized access, improper use, and destruction.
Internal controls should be built into computer information systems to protect a company’s information
resources from unauthorized access, improper use, and destruction.
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Computer System ControlsComputer System ControlsComputer System ControlsComputer System Controls
Users should have appropriate identification and passwords to
log onto networks or to use network resources.
Users should have appropriate identification and passwords to
log onto networks or to use network resources.
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Human Resources ControlsHuman Resources ControlsHuman Resources ControlsHuman Resources Controls
Conducting background checks to identify employees who have a history of improper behavior.
Maintaining a good training program to ensure employee development and maintenance of skills.
Hiring qualified employees who have the appropriate skills for a particular job.
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Human Resources ControlsHuman Resources ControlsHuman Resources ControlsHuman Resources Controls
An important control involves segregation of duties so that an
employee does not have access to resources and information that would
make it easy for the employee to misuse those resources.
An important control involves segregation of duties so that an
employee does not have access to resources and information that would
make it easy for the employee to misuse those resources.
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Physical ControlsPhysical ControlsPhysical ControlsPhysical Controls Merchandise and materials can be secured
in warehouses or display cases. Merchandise can be tagged electronically
to make shoplifting or theft difficult. Surveillance equipment can monitor
important resources. Cash registers, vaults, and safety deposit
boxes can be used to secure financial resources.
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THE ENDTHE END
CCHAPTERHAPTER 6 6
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