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 managements 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 companys 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 employees 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.