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1.
Three Functions of Internal Controls
The three primary functions of internal controls are:
1. Preventive Controls: These are designed to minimize the likelihood of errors or fraud
before they occur. Examples include policies and procedures that enforce proper
authorization, employee training on compliance, and physical safeguards (like locks and
security systems).
2. Detective Controls: These controls identify and detect errors or irregularities after they
have occurred. Examples include regular reconciliations of accounts, audits, and reviews
of transactions to ensure proper compliance with policies.
3. Corrective Controls: These controls are designed to rectify or mitigate the impact of
errors or irregularities that have already been identified. Examples include corrective
measures like disciplinary actions, process improvements, and modifications to existing
policies to prevent recurrence of issues.
2. Two Categories of Internal Controls
Internal controls can be categorized into:
1. Preventive Controls: These are proactive measures intended to deter errors or fraud
before they happen. This can include segregation of duties, proper authorization, and
training.
2. Detective Controls: These controls are reactive and are used to identify and rectify errors
or fraud. Examples include regular internal audits, reconciliations, and performance
reviews.
3. Difference Between General and Specific Authorization
 General Authorization: This type of authorization is broad and applies to established

categories of transactions. For example, a manager might be given general authority to
approve all expenses up to a certain limit without needing further approval. It streamlines
routine decision-making across lower levels of the organization.
 Specific Authorization: This refers to approvals given for individual transactions or
activities that require a higher level of scrutiny. For instance, a capital expenditure may
require specific authorization from the board of directors or senior management to ensure
detailed review and approval.
4. Primary Objective of the Foreign Corrupt Practices Act (FCPA)
The primary objective of the Foreign Corrupt Practices Act is to make it illegal for U.S.
companies and citizens to bribe foreign officials for the purpose of obtaining or retaining
business. The FCPA aims to combat corruption and enhance accountability in international
business transactions.
The FCPA is of particular interest to accountants because it emphasizes the necessity for
accurate financial records and strong internal controls to detect and prevent illicit payments.
Accountants play a crucial role in ensuring compliance and maintaining the integrity of financial
reporting, which helps organizations avoid legal and reputational risks associated with
corruption.
5. Three Reasons Why AIS Threats Are Increasing
1. Increased Cybersecurity Threats: The prevalence and sophistication of cyber attacks

have escalated, including various forms of malware, ransomware, and phishing schemes.
As organizations rely more on computerized accounting information systems (AIS), they
become targets for cybercriminals seeking financial gain or sensitive information.
2. Widespread Use of Digital Technology: Organizations are increasingly automating

processes and using cloud-based systems for accounting and financial information
management. This reliance on technology increases potential vulnerabilities, especially if
these systems are inadequately secured against unauthorized access.
3. Evolving Regulatory Environment: More stringent regulations related to data

protection, privacy (e.g., GDPR, CCPA), and financial reporting have emerged. This
regulatory pressure can lead organizations to prioritize compliance over comprehensive
risk management, which can make them more susceptible to threats if proper controls are
not implemented and maintained.
6. Internal (Control) Environment
The internal control environment forms the foundation of an organization's overall internal
control system and represents the organizational culture regarding risk management and internal
controls. Key components include:
1. Management's Philosophy and Operating Style: The attitudes of management

regarding risk-taking, oversight, and ethical business practices can greatly impact how
internal controls are designed and enforced.
2. Integrity and Ethical Values: A commitment to integrity and ethical behavior promotes
a culture of accountability and compliance throughout the organization. This establishes a
standard for all employees to follow.
3. Organizational Structure: A clear outline of roles and responsibilities ensures

accountability within the organization. A well-defined organizational structure helps
ensure appropriate oversight over business activities.
4. Human Resource Policies: Robust recruitment, training, and performance evaluation

practices ensure that personnel are competent and adequately prepared to uphold internal
control responsibilities.
5. Commitment to Competence: An organization needs to have competent personnel who

understand the importance of internal controls and possess the skills needed to execute
their responsibilities effectively.

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1.

Three Functions of Internal Controls

The three primary functions of internal controls are:

2. Two Categories of Internal Controls

Internal controls can be categorized into:

3. Difference Between General and Specific Authorization

 General Authorization: This type of authorization is broad and applies to established

4. Primary Objective of the Foreign Corrupt Practices Act (FCPA)

5. Three Reasons Why AIS Threats Are Increasing

1. Increased Cybersecurity Threats: The prevalence and sophistication of cyber attacks

2. Widespread Use of Digital Technology: Organizations are increasingly automating

3. Evolving Regulatory Environment: More stringent regulations related to data

1. Management's Philosophy and Operating Style: The attitudes of management

3. Organizational Structure: A clear outline of roles and responsibilities ensures

4. Human Resource Policies: Robust recruitment, training, and performance evaluation

5. Commitment to Competence: An organization needs to have competent personnel who

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