The accuracy of accounting records is enhanced by the integrity of internal controls. Comment on this statement and provide justification for it. Include illustrations of how this does or does not apply Solution Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also part of internal control. Internal accounting control is a series of procedures designed to promote and protect sound management practices, both general and financial. Following internal accounting control procedures will significantly increase the likelihood that: o financial information is reliable, so that managers and the board can depend on accurate information to make programmatic an d other decisions o assets and records of the organization are not stolen, misused, or accidentally destroyed o the organization s policies are followed o government regulations are met. Developing an Internal Accounting Control System The first step in developing an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. Many accountants can provide you with a checklist of areas and questions to consider when you are planning your system. Price Waterhouse\'s booklet, Effective Internal Accounting Control for Nonprofit Organizations: A Guide for Directors and Management, includes the following areas and objectives in developing an effective internal accounting control system: o Cash receipts To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security. o Cash disbursements To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded. o Petty cash To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded. o Payroll To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as payroll tax deposits) are complied with. o Grants, gifts, and bequests To ensure that all grants, gifts, and bequests are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored. o Fixed assets To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded. Additional internal controls are also required to ensure proper recording of donated materials, pledges and other revenues, accurate, timely financial reports and information returns, and compliance with other government regulations. Achieving these objectives requires your organizat.

1. The accuracy of accounting records is enhanced by the integrity of internal controls. Comment
on this statement and provide justification for it. Include illustrations of how this does or does
not apply
Solution
Internal control is the process designed to ensure reliable financial reporting,
effective and efficient operations, and compliance with applicable laws and regulations.
Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also part of
internal control. Internal accounting control is a series of procedures designed to promote and
protect sound management practices, both general and financial. Following internal accounting
control procedures will significantly increase the likelihood that: o financial information is
reliable, so that managers and the board can depend on accurate information to make
programmatic an d other decisions o assets and records of the organization are not stolen,
misused, or accidentally destroyed o the organization s policies are followed o government
regulations are met. Developing an Internal Accounting Control System The first step in
developing an effective internal accounting control system is to identify those areas where
abuses or errors are likely to occur. Many accountants can provide you with a checklist of areas
and questions to consider when you are planning your system. Price Waterhouse's booklet,
Effective Internal Accounting Control for Nonprofit Organizations: A Guide for Directors and
Management, includes the following areas and objectives in developing an effective internal
accounting control system: o Cash receipts To ensure that all cash intended for the organization
is received, promptly deposited, properly recorded, reconciled, and kept under adequate security.
o Cash disbursements To ensure that cash is disbursed only upon proper authorization of
management, for valid business purposes, and that all disbursements are properly recorded. o
Petty cash To ensure that petty cash and other working funds are disbursed only for proper
purposes, are adequately safeguarded, and properly recorded. o Payroll To ensure that payroll
disbursements are made only upon proper authorization to bona fide employees, that payroll
disbursements are properly recorded and that related legal requirements (such as payroll tax
deposits) are complied with. o Grants, gifts, and bequests To ensure that all grants, gifts, and
bequests are received and properly recorded, and that compliance with the terms of any related
restrictions is adequately monitored. o Fixed assets To ensure that fixed assets are acquired and
disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.
Additional internal controls are also required to ensure proper recording of donated materials,

2. pledges and other revenues, accurate, timely financial reports and information returns, and
compliance with other government regulations. Achieving these objectives requires your
organization to clearly state procedures for handling each area, including a system of checks and
balances in which no financial transaction is handled by only one person from beginning to end.
This principle, called segregation of duties, is central to an effective internal controls system.
Even in a small nonprofit, duties can be divided up between paid staff and volunteers to reduce
the opportunity for error and wrongdoing. For example, in a small organization, the director
might approve payments and sign checks prepared by the bookkeeper or office manager. The
board treasurer might then review disbursements with accompanying documentation each month,
prepare the bank reconciliation, and review canceled checks. The board and executive director
share the responsibility for setting a tone and standard of accountability and conscientiousness
regarding the organization's assets and responsibilities. The board, usually through the work of
the finance committee, fulfills that responsibility in part by approving many aspects of the
internal control accounting system. Common areas requiring board attention include: o Check
issuance The number of signatures on checks, dollar amounts which require board approval or
board signature on the check, who authorizes payments and financial commitments, etc. o
Deposits How payments made in cash (for admissions, raffles, weekly collection plate, etc.) will
be handled, etc. o Transfers If and when the general fund can borrow from restricted funds, etc. o
Approval of plans and commitments before they are implemented The annual budget and
periodic comparisons of financial statements with budgeted amounts, leases, loan agreements,
and other major commitments. o Personnel policies Salary levels, vacation, overtime,
compensatory time, benefits, grievance procedures, severance pay, evaluation, and other
personnel matters. The Accounting Procedures Manual The policies and procedures for
handling financial transactions are best recorded in an Accounting Procedures Manual,
describing the administrative tasks and who is responsible for each. The manual does not have to
be a formal document, but rather a simple description of how functions such as paying bills,
depositing cash, and transferring money between funds are handled. As you start to document
these procedures, even in simple memo form, the memos themselves can be kept together to
form a very basic Accounting Procedures Manual. Writing or revising an Accounting Procedures
Manual is a good opportunity to see whether adequate controls are in place Maintaining
Effective Controls The executive director is commonly responsible for overseeing the day-to-day
implementation of these policies and procedures. Due to the number of detailed