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Question: How does the Sarbanes-Oxley Act relate to internal controls?

Short Answer

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Answer:

Sarbanes-Oxley Act revamped corporate governance in the United States and was introduced to establish the internal control system in an organization to prevent the accounting scandals.

Step by step solution

01

Meaning of Internal Control

Internal control refers to a process followed by business organizations to safeguard assets, motivate and encourage employees to follow the company's policies, and decrease the chances of fraud.

02

Relation of Sarbanes-Oxley act with internal control

The Sarbanes-Oxley Act relates to internal control because according to this act companies need to review controls and take all the responsibility for the accuracy of the financial reports. This act has a provision that the company must issue an internal control report in which all the responsibility and the accuracy of the financial reports are described.

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Most popular questions from this chapter

List internal control procedures related to e-commerce.

Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.

a. Top managers delegate all internal control procedures to the accounting department.

b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.

c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each dayโ€™s cash sales.

d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.

Requirements

1. Define internalcontrol.

2. The system of internal control must be tested by external auditors. What law or rule requires this testing?

3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.

The Scott Sun & Shade Company had the following financial data at December 31, 2018:

Cash and cash equivalents $ 60,000

Total current liabilities 75,000

What is the cash ratio as of December 31, 2018, for Scott Sun & Shade?

Fill in the missing information.

a. The vendor ships the inventory and sends a(n) __________ back to the purchaser.

b. After approving all documents, the purchaser sends a(n) __________ to the vendor.

c. When ordering merchandise inventory, the purchaser sends a(n) __________ to the vendor.

d. The purchaser receives the inventory and prepares a(n) __________.

List some examples of timing differences, and for each difference, determine if it would affect the book side of the reconciliation or the bank side of the reconciliation.

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