CHAPTER

Settin
g the WorldCom disclosed massive financial
statement fraud and filed for bankruptcy,
Stage becoming a horror story involving the
largest accounting fraud ever reported, SEC
investigations, the resignation and
incarceration of CEO Bernard Ebbers, a
$101.9 billion bankruptcy, and a stock that
was worth less
thanUnited
The a pay States
phone is
call.
not the only country
that had
such scandals.
CHAPTER
Internal Controls : Ensuring the Integrity
5 of Financial Information

LO1 LO2 LO3

Safeguards
The Types of Designed to Reasons for
Problems That Can Minimize Problems Earnings
Occur Management

LO4 LO5 LO6

The Role of The Securities and
The Sarbanes-Oxley Auditors in the Exchange
Act Accounting Commission
Process
LO1 The Types of Problems That Can Occur

LO1 Types of Problems

Errors 錯誤
► Unintentional mistakes 非故意錯誤
► Immediately corrected when being detected 發現錯
誤立即更正
► Result from sloppy accounting, bad assumptions,
misinformation, miscalculations, and other
factors. 是由草率的會計、不良的假設、錯誤的資訊、錯誤的計算、或是其他因素所
造成的結果。

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LO1 The Types of Problems That Can Occur

LO1 Types of Problems

Disagreements 不同意
► Different conclusions based on the same set of facts 基
於相同的事實，卻得出不同的結果
► Often come about because of the different incentives.
通常來自於有不同的誘因。
Frauds 舞弊
► Intentional errors 故意的錯誤
► Management manipulates financial statements to
deceive investors. 管理當局操縱財務報表以欺騙投資者。
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LO1
LO1 Types of Errors in the Reporting Process
Errors in Transactions and Journal Entries
► When $5,000 is paid to an attorney for legal services, the following
entry is made.

Legal Expense 5,000

Cash 5,000
Paid an attorney $5,000 for legal service

Errors in Transactions and Journal Entries 交易和日記簿分錄之錯誤

► The document was lost and was not entered into the accounting records. 交易憑證已經遺
失並且未作會計紀錄。
► The amount entered into the accounting records was incorrect. 金額已作會計紀錄但不正確。
► The accounts involved were incorrectly identified. 使用到不正確的會計科目。
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LO1
LO1 Types of Errors in the Reporting Process

Errors in Accounts and Ledgers 科目和分類帳之錯誤

► Posting to the wrong account 過帳至錯誤的科目
► Posting the wrong amount 將錯誤的金額過帳

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LO1
LO1 Disagreements in Judgement
 Accountants are constantly making judgements and
estimates.
► It is not correct to assume that accounting involves exactness
and precision.

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LO1
LO1 Disagreements in Judgement
 Assume that you sign a contract to provide all the
landscaping for condominium complex currently under
construction.
► The customer needs to pay one-half of the contract amount up
front and the remaining one-half upon completion.
► You begin to work in early December and will not finish until
January next year.

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LO1
LO1 Disagreements in Judgement
► To prepare financial statements at the end of December,
how much of the contract should you report as revenue?
• It depends on how close to the completion the job is. If you
are 25% (75%) complete, you report 25% (75%) of the
contract amount as revenue.
• The hard part is to make judgement on “how much of the
job has been complete”.

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LO1
LO1 Fraudulent Financial Reporting
 Fraudulent financial reporting is intentional
► Assume that a company’s accountant embezzles $5,000.
► When $5,000 is paid to an attorney for legal services, the
following entry is made.
Legal Expense 5,000
Cash 5,000
Paid an attorney $5,000 for legal service

► The accountant can create a fictitious invoice from a phantom

law firm.
► Unless someone is watching closely, the theft may do
undetected.
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LO2 Safeguards Designed to Minimize Problems

LO2 Internal Control Structure

 Policies and procedures established to provide

management with reasonable assurance that the
objectives of an entity will be achieved. 政策和程序的建立提供管理當
局合理確信將可以達成企業個體的目標。
 The responsibility for establishing and maintaining the
internal control structure belongs to a company’s
management.

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LO2
LO2 Internal Control Structure

Five Concerns When Designing Internal Controls:

Five Concerns When Designing Internal Controls 在設計內部控制時應關注的五件事
項:
► To provide accurate accounting records and financial statements
containing reliable data for business decisions. 提供精確的會計記錄和可靠資料的
財務報表讓企業作決策。
► To safeguard assets and records. 為了保全資產和記錄。
► To effectively and efficiently run their operations, without duplication
of effort or waste. 為了能讓企業有效果和有效率運行，並不造成重複努力或浪費。
► To follow management policies. 可遵循管理政策。
► To comply with the laws and regulations (e.g., Foreign Corrupt
Practices and Sarbanes-Oxley acts in the U.S.), which require
companies to maintain proper record-keeping systems and controls.
為了遵守法律和法規規定（如美國的海外貪污防治法和沙賓氏法案），其要求企業應有適當的記錄保存系統和控制。
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LO2
LO2 Internal Control Structure

Sarbanes-Oxley Act 沙賓法案

► A law passed by the U.S. Congress in 2002.
► Gives the SEC significant oversight responsibility and
control over companies issuing financial statements and
their external auditors.

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LO2
LO2 Internal Control Structure

Sarbanes-Oxley Act 沙賓法案

► Requires every company’s annual report contain an “internal
control report,” which must 每家公司的年報均包含「內部控制報告」，必須：
► state the responsibility of management for establishing and
maintaining an adequate internal control structure and
procedures for financial reporting. 說明管理當局的責任為建立和維護有效的內部控制
結構和財務報導程序。
► contain an assessment of the effectiveness of the internal
control structure by management. 包含管理當局對內部控制結構有效性的評估。
► contain an independent assessment of the reliability of internal
controls by the independent auditor. 包含獨立會計師對內部控制的可靠性進行獨立
評估。

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 TSMC’s management internal control report
Management
responsibility

Five
components

Management
assessment of
effectiveness
of internal
control

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 IBM’s management internal control report

Management
responsibility

Management
assessment of
effectiveness of
internal control

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LO2
LO2 Internal Control 內部控制

Five Basic Categories of Internal Control Structure

► The control environment 控制環境
► Risk Assessment 風險評估
• Covered in auditing course

► Control activities 控制活動

► Information and communication 資訊與溝通
• Covered in auditing course

► Monitoring 監督

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LO2
LO2 The Control Environment
 The actions, policies, and procedures that reflect the
overall attitudes of top management about control and its
importance to the company. 企業的活動、政策和程序，都反映高層管理當局對
控制的整體態度，和其對公司的重要性
 Organizational structure
► Identify clear lines of authority and responsibility
► A complex organization structure makes companies easier to
conceal dishonest transaction. 複雜的組織結構會使得企業更容易掩飾不實的交易。

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LO2
LO2 The Control Environment
 Independent oversight of management decisions
► A board of directors consisting of independent directors.
► Establishing an audit committee, who must be financially
literate, and responsible for the appointment of the external
auditor. 透過設置審計委員會來進行獨立的監督。
► Both internal and external auditors are accountable to the
audit committee.

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LO2
LO2 Control Activities (Procedures)

 Policies and procedures used by management to meet

their objectives. 管理當局使用政策和程序，以達到他們的目標。
 Control activities fall into five categories 控制活動分為五類：
► Segregation of duties 職責分工
Preventative
► Proper procedures for authorization 適當的授權程序 Controls
► Physical control over assets and records 預防性措施
對資產和記錄的實體控制
► Adequate documents and records
足夠的交易憑證和記錄 Detective
Controls
► Independent checks on performance 對績效的獨立檢查 偵測性措施

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LO2
LO2 Control Activities (Procedures)

Adequate Segregation of Duties 適當的職責區分 ( 分工 )

► No one department or individual should be responsible for
handling all or conflicting phases of a transaction. 沒有任何一個部
門或個人應當負責處理一筆交易所有 ( 或衝突 ) 的階段。
► Three functions should be performed by separate
departments or by different people 有三項功能應該由獨立的部門或由不同的
人來執行：
1. Authorization 授權
2. Record keeping 記錄保持
3. Custody of assets 資產的保管
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LO2
LO2 Control Activities (Procedures)

Proper Procedure for Authorization

► Stockholders elect a board of directors.
► The board of directors and upper-level management
has a general power of authorization.
• The board authorizes dividends, a change in policies or a
merger.
► A clerk has limited authority.
• Restricted to authorizing credit on a specific cash
transactions.

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LO2
LO2 Control Activities (Procedures)

Physical Control over Assets and Records

► physical safeguards
• Physical precautions used to protect assets and records.

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LO2
LO2 Control Activities (Procedures)

Adequate Documents and Records

► A well-designed document has several characteristics:
• It is easily interpreted and understood.

• It has been designed with all possible uses in mind.

• It has been pre-numbered for easy identification and

tracking.

• It is formatted so that it can be handled quickly and

efficiently.

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distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25
LO2
LO2 Control Activities (Procedures)

Independent Checks on Performance

► independent checks
• Procedures for continual internal verification of other
controls.

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LO2
LO2 Control Environment vs. Control Activities
► Most organizations have an internal control system that,
among other things, helps ensure integrity in financial
reports.
► The various elements of control that relate to financial
reporting are summarized as follows.

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LO3 Reasons for Earnings Management

LO3 Manipulating Reported Earnings

 Some of the reasons that managers may manipulate

reported earnings are as follows:
► Meet Internal Targets
► Meet External Expectations
► Income Smoothing
► Window Dressing for an IPO a Loan

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LO3
LO3 Meet Internal Targets

 Internal earnings targets are an important tool in

motivating managers to increase sales efforts, control
costs, and use resources more efficiently.
 As with any performance measurement tool, the person
being evaluated will have a tendency to forget the
economic factors underlying the measurement and instead
focus on the measured number itself. 被評價的人則傾向於聚焦在所衡量
的數字本身。

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LO3
LO3 Meet External Expectations

 A wide variety of external stakeholders have an interest in

the financial performance of a company. For these
stakeholders, signs of financial weakness, such as the
reporting of negative earnings, are very bad news indeed.
 Accordingly, we shouldn’t be surprised that in some
companies when the initial computations reveal that a
company will report a net loss, the company’s accountants
are asked to go back to the accrual judgments and
estimates to see if just a few more dollars of earnings can
be squeezed out in order to get earnings to be positive.

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LO3
LO3 Income Smoothing

Exhibit 5.3 Income

Smoothing
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LO3
LO3 Window Dressing for an IPO for a Loan

 For companies entering phases where it is critical that

reported earnings look good, accounting assumptions can
be stretched—sometimes to the breaking point.
 Such phases include just before making a large loan
application or just before the initial public offering (IPO) of
stock.
 Making the earnings look as good as possible for investors
or/and bankers. 讓投資者或 / 和銀行家使其覺得公司盈餘看起來很好。

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LO3
LO3 Is Earnings Management Ethical?

The GAAP Oval

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LO4 The Sarbanes-Oxley Act

LO4 The Sarbanes-Oxley Act (SOX) 沙賓法案

Public Company Accounting Oversight Board (PCAOB)

美國公眾公司會計監督委員會
► Board of five full-time members established by the
Sarbanes-Oxley Act to oversee the accounting and
auditing profession. 沙賓氏法案設置五種專職成員的委員會，負責監督會計和審
計專業。

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LO4
LO4 The Sarbanes-Oxley Act (SOX) 沙賓法案

Constraints on Auditors 會計師 ( 審計人員 ) 的限制

► Prohibited from providing several non-audit services to
their clients. 禁止為他們的客戶提供數種非審計服務。
► Audit partners on engagements be rotated off the audit
every five year. 會計師在審計雇傭契約的合作夥伴必須每五年就更換 ( 旋轉門條
款)。
► Auditors report to and be retained by the audit
committee rather than the CFO or other members of the
company’s management. 會計師的報告和聘任是由審計委員會負責，而不
是 CFO( 財務長 ) 或公司管理當局的其他成員。

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LO4 The Sarbanes-Oxley Act (SOX) 沙賓法案

Constraints on Management 管理當局的限制

► Prepare a statement to accompany the audit report to certify to the
appropriateness of the financial statements and disclosures.
Management must also provide an assessment of internal controls
in each annual report. 編製一張聲明並連同審計報告，以證明該財務報表和揭露是適當的。管理
當局還必須在每一年度年報中提供內部控制的評估。
► All public companies must develop and enforce an officer code of
ethics. 所有上市公司必須發展和執行官方的職業道德規範。
► Loans to executive officers and directors are prohibited. 禁止貸款給經理人
員和董事。
► Management must support a much stronger board and audit
committee in each public company. The audit committee is a
subset of the board of directors. 每個上市公司中，管理當局必須支持更強大的董事會和審
計委員會。審計委員會是董事會的一個子集 (subset) 。

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LO4
LO4 Regulatory Reactions of Other Countries

 European Union (EU) : The 8th Company Law Directive on

Statutory Audit 法定審計之歐盟第 8 號公司法指令
 Japan : The Financial Instruments and Exchange Law (J-SOX) 金
融商品交易法
 China : Basic Standard for Enterprise Internal Control (C-SOX) 企
業內部控制基本規範
 Taiwan : The corporate governance requirements such as
independent directors and audit committee in the Sarbanes-
Oxley Act were incorporated into the 2006 amendment to Taiwan’s
Securities and Exchange Act. 公司治理的要求，例如獨立董事和沙賓氏法案的審計委員會，
已納入台灣 2006 年所修訂的證券交易法。
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LO5 The Role of Auditors in the Accounting Process

LO5 The Role of Auditors in the Accounting Process

 Auditors provide management (and stockholders) with

some assurance that
會計師 ( 審計人員 ) 提供管理當局 ( 和股東 ) 的一些確性
► The internal control system is functioning properly and
that 內部控制系統已適當的運作，並且
► The financial statements fairly represent the financial
performance of the firm. 財務報表已公允地呈現公司的財務績效。

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LO5
LO5 Types of Auditors

Internal Auditors 內部稽核

► An independent group of experts in controls, accounting, and
operations
Works of Internal Auditors
Monitor operating results and financial records
Evaluate internal controls
Assist with increasing the efficiency and effectiveness of
operations
Make sure that laws and regulations are complied
Detect fraud
► 監督經營結果和財務記錄，評估內部控制，幫助提升運營的效率和效果，可以確保已遵守法律和法規，甚至還
可以偵測出舞弊行為。

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LO5
LO5 Types of Auditors

External Auditors 外部審計

► Independent CPAs examine an organization’s financial
statements to determine if they are prepared and
presented in accordance with GAAP and are free from
material (significant) misstatement. 獨立的會計師檢測企業的財務報
表，以確定它們是 ( 否 ) 依照 GAAP 來編製，並且無重大 ( 顯著 ) 誤述。
► Issue opinions about the reliability of an organization’s
internal controls. 簽發有關企業內部控制可靠性之意見。

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LO5
LO5 Types of Auditors

External Auditors
► CPAs are required by generally accepted auditing standards
(GAAS) to provide reasonable assurance that significant fraud or
misstatement is not present in financial statements. 會計師需要透過一般公認
審計準則 (GAAS) 查核，以提供合理確信財務報表並無重大舞弊或者誤述。
► It is not possible for auditors to guarantee that financial statements
are “correct.” 審計人員無法保證財務報表一定是“正確的”

Can only provide reasonable assurance that

financial statements are “presented fairly.” 只能提供
合理的確信財務報表已“允當表達”

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LO5
LO5 Types of Auditors

Key Audit Matters (KAMs)

 Recently, auditors are required to disclose key audit
matters (KAMs) in the report.
 Communicating KAMs may also assist them in
understanding the company and areas of significant
management judgment in the audited financial statements.

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LO5
LO5 TSMC 2019 auditor’s report
Independent Auditors’ Report

• provide
reasonable
assurance
that financial
statements
are
“presented
fairly.”

Exhibit 5.5

© 2021 Cengage. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO5
LO5 TSMC 2019 auditor’s report
Independent Auditors’ Report (cont.)

Exhibit 5.5
© 2021 Cengage. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO5
LO5 TSMC 2019 auditor’s report
Independent Auditors’ Report (cont.)

Exhibit 5.5
© 2021 Cengage. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO6 The Securities and Exchange Commission
LO6 The Role of Securities and Exchange
Commission
 The Securities and Exchange Commission (SEC) is
responsible for ensuring that investors, creditors, and other
financial statement users are provided with reliable
information upon which to make investment decisions.
 The Securities Act of 1933 requires most companies
planning to issue new debt or stock securities to the public
to submit a registration statement to the SEC for approval.

© 2021 Cengage. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46
LO6
LO6 The Role of Securities and Exchange
Commission

 The SEC examines these statements for completeness

and adequacy before permitting companies to sell
securities through securities exchanges.
 The Securities Exchange Act of 1934 requires all public
companies to file detailed periodic reports with the SEC.
 The SEC requires a considerable amount of information to
be included in these filings. Among other things, a
company must submit financial statements that have been
audited by CPAs and that contain an opinion issued by
those CPAs.

© 2021 Cengage. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO6
LO6 The Role of Securities and Exchange
Commission

 Of the many reports required by the SEC, the following

have the most direct impact on financial reporting:
► Registration statements.
► Form 10-K.
► Form 10-Q.

© 2021 Cengage. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.