Internal Controls and Fraud Prevention Flashcards

Which of the following is NOT a component of the COSO internal control framework?

Answer: Profitability analysis

Profitability analysis is a financial metric, not one of the five COSO components: control environment, risk assessment, control activities, information/communication, and monitoring.

When a bookkeeper handles both payroll preparation and check distribution, the PRIMARY risk is:

Answer: Issuing fictitious payroll checks

Controlling both payroll preparation and distribution allows an employee to create and collect ghost-employee or inflated paychecks.

A numbered sequence for checks, invoices, and purchase orders is maintained primarily to:

Answer: Detect missing or unauthorized documents

Sequential numbering creates an audit trail that allows easy identification of missing, duplicate, or unauthorized documents.

Which activity is considered a preventive internal control?

Answer: Requiring supervisory approval before disbursements

Preventive controls, like requiring approvals before transactions occur, stop errors and fraud before they happen.

An employee with access to the accounting software creates a fictitious vendor and processes payments to themselves. This fraud is BEST prevented by:

Answer: Restricting vendor master file changes to a separate employee

Separating vendor master file maintenance from payment processing prevents an employee from creating and paying fictitious vendors.

Which of the following BEST describes a detective internal control?

Answer: Monthly reconciliation of the bank statement to the general ledger

Detective controls, like reconciliations, identify errors or irregularities that have already occurred rather than preventing them.