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Internal Controls

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Internal Controls

  1. 1. Internal Controls
  2. 2. Purpose of Internal Control <ul><li>An internal control system is all policies and procedures managers use to . . . </li></ul><ul><ul><li>Protect assets. </li></ul></ul><ul><ul><li>Ensure reliable accounting. </li></ul></ul><ul><ul><li>Promote efficient operations. </li></ul></ul><ul><ul><li>Urge adherence to company policies. </li></ul></ul><ul><li>As a sole proprietorship or partnership grows, the owner(s) loses personal contact with daily operations. The need to rely on internal control procedures rather than personal contact increases. </li></ul>
  3. 3. Principles of Internal Control <ul><li>Establish responsibilities for each task clearly and for one person. </li></ul><ul><li>Maintain adequate records. </li></ul><ul><li>Insure assets and bond employees. </li></ul><ul><li>Separate recordkeeping and custody over assets. </li></ul><ul><li>Divide responsibility for related transactions (separation of duties). </li></ul><ul><li>Apply technological controls. </li></ul><ul><li>Perform regular and independent reviews. </li></ul>
  4. 4. Technology and Internal Control <ul><li>Technology provides rapid access to large quantities of information. </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Reduced processing errors. </li></ul></ul><ul><ul><li>More extensive testing of records. </li></ul></ul><ul><ul><li>Limited evidence of processing </li></ul></ul><ul><ul><li>Crucial separation of duties. </li></ul></ul>
  5. 5. Limitations of Internal Control <ul><li>Human error </li></ul><ul><li>Human fraud </li></ul><ul><li>Cost-benefit principle —the costs of internal controls must not exceed their benefits. </li></ul>
  6. 6. Guidelines for Control of Cash <ul><li>Separate handling of cash from recordkeeping of cash. </li></ul><ul><li>Cash receipts are promptly (daily) deposited in a bank. </li></ul><ul><li>Cash disbursements are made by cheque. (Exception: petty cash disbursements). </li></ul>
  7. 7. Petty Cash <ul><li>Used to make small payments in cash </li></ul><ul><li>Assigning a petty cashier (custodian) to account for the amounts expended and keep receipts. </li></ul><ul><li>Debit to Petty Cash only when the fund is established or increased. </li></ul><ul><li>No further entries made until it is time to reimburse the fund </li></ul><ul><li>Reimbursement—debit the expenses or other items paid for with petty cash and credit Cash for the amount reimbursed to the petty cash fund. </li></ul>
  8. 8. Cash Over and Short <ul><li>Used if the petty cash receipts and actual cash on hand do not equal the value of the petty cash fund. </li></ul><ul><li>Account may represent an expense or revenue </li></ul><ul><li>If there is a shortage (less cash then there should be), it is debited. (expense) </li></ul><ul><li>If there is a overage (more cash then there should be), it is credited. (revenue) </li></ul>
  9. 9. Banking Activities As Controls <ul><li>Bank accounts permits depositing money for safeguarding and writing cheques </li></ul><ul><li>Bank deposit slip lists components of a deposit, copy is retained by depositor and the bank. </li></ul><ul><li>Bank cheque is a document instructing the bank to pay a certain amount to a certain party. </li></ul><ul><li>Electronic funds transfer (EFT) use of electronic communication to transfer cash from one party to another. </li></ul><ul><li>Bank Statements show the activity in the accounts over a period of time (usually a month). </li></ul>
  10. 10. Bank Reconciliation <ul><li>Reasons for a difference in the bank statement and the depositor’s book balance </li></ul><ul><ul><li>Outstanding cheques. </li></ul></ul><ul><ul><li>Unrecorded deposit. (Deposits in transit.) </li></ul></ul><ul><ul><li>Deductions for uncollectible items and services </li></ul></ul><ul><ul><li>Additions for collections and interest. </li></ul></ul><ul><ul><li>Errors </li></ul></ul><ul><li>Two sections: </li></ul><ul><ul><li>Reconcile bank statement balance to the adjusted bank balance. </li></ul></ul><ul><ul><li>Reconcile book balance to the adjusted book balance. </li></ul></ul><ul><li>The adjusted balances should be equal. </li></ul>
  11. 11. Steps in Preparing a Bank Reconciliation <ul><li>Identify the bank balance of the cash account ( balance per bank ). </li></ul><ul><li>Identify and list any unrecorded deposits and any bank errors understating the bank balance. Add them to the bank balance. </li></ul><ul><li>Identify and list any outstanding cheques and any bank errors overstating the bank balance. Deduct them from the bank balance. </li></ul><ul><li>Compute the adjusted bank balance , also called corrected or reconciled balance. </li></ul><ul><li>Identify the company's balance of the cash account ( balance per book ). </li></ul><ul><li>Identify and list any unrecorded credit memoranda from the bank for interest earned, and errors under­stating the book balance. Add them to the book balance. </li></ul><ul><li>Identify and list any unrecorded debit memoranda from the bank for service charges, NSF cheques, periodic payments arranged in advance, by the depositor, and errors over­stating the book balance. Deduct them from the book balance. </li></ul>

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