Module 4 Flashcards
(49 cards)
What are internal controls?
> those policies and procedures that every company should have in place to:
protect our assets
maintain reliable account records
promote efficient operations
encourage adherence to company policy
What are the five basic principles of internal control?
1) Proper authorization
2) Segregation of Duties
3) Safeguarding of assets
4) Appropriate documentation
5) verification
What is proper authorization?
> “all transactions or event undertaken by a company must be approved by an appropriate person. Disapproval must be documented.”
What are examples of proper authorization?
> a raise in pay for an employee must be approved by a manager before it is changed in the system.
> an HR manager must approve a new hire before they can be set up in the system.
> an invoice must be approved before it is paid.
> a purchase order must be completed and approved before an order is placed.
What is segregation of duties?
> segregation of duties is where possible, duty should be split between individuals to prevent and or detect fraud and errors.
Can ideal segregation of duties be achieved in smaller companies?
> in smaller companies, ideal segregation of duties can never be achieved. When this happens, compensating controls must be used. For example, if there is only one person on staff to handle all payroll functions, a manager should sign off on all changes made to the employee information (for example, banking address, new hires, etc.)
What are examples of segregation of duties?
> the person who processes payroll should not have authority to set up new hires or change employee information.
> duties of ordering purchases and receiving them should be done by two separate people.
> the person responsible for handling cash Chanel also have access to the accounting and there should be a third person that is responsible for balancing the bank with the accounting records.
> a person who has authority to grant discounts should not be able to also provide refunds.
What is safeguarding of assets?
> safeguarding of assets is when all assets cash, as well as non-cash must be protected from misuse and theft.
What are examples of safeguarding?
> any cash on site, appropriate levels of insurance should be maintained to reduce the risk of loss, and key employees should be bonded.
What is appropriate documentation and when can it then be used?
> appropriate documentation is standardize forms of financial transactions, such as invoices, purchase, orders, inventory, receipts, and travel expense reports can you help to ensure accuracy and consistency. Prenumbered forms for invoices and checks will help to ensure against loss or theft..
> this paperwork and then we use his back up documentation to support transactions in the accounting records.
What are examples of appropriate documentation?
> a purchase order must be used for all purchases.
> An employee personnel form must be completed for all new hires.
> Every cheque written must be accompanied by documentation explaining its purpose.
> A customer invoice must be accompanied by a shipping document
What is verification?
> there must be systems in place to ensure that policies and procedures are being followed.
> in a nutshell, policies and procedures are not effective, if they are not being followed. The verification principal make sure that we’re following the rules.
Provide verification examples were managers, supervisors, or an internal audit department, should review certain documents, such as:
> individual pay rates and salary is actually paid to ensure that they’re accurate.
> Employee expense or supports to ensure that all claims are supported by receipts and appropriately approved.
> payments to ensure that all have properly approved purchase orders, and that the goods were actually receive before payment.
> shipping documents to ensure that an invoice was created for every item that was shipped in the warehouse.
> inventory records to ensure all goods ordered and shipped are properly accounted for.
What does cash include?
> Cash includes currency and coins, deposits in banks, other items, acceptable for deposit, such as cheques and blank cheques.
What two components do we need special control over?
> cash disbursements
cash reciepts
What is the cash disbursements procedure?
1) all disbursements with the exception of petty cash are made by cheque.
2) all checks are sequentially numbered, payable to either a specific individual or company
3) All payments are substantiated with an approved supplier invoice (and other documents such as a purchase order and receiving report)
4) a bank reconciliation is prepared monthly.
What should be done when using petty cash?
> only one individual has access to the fund.
What is the cash receipts procedure?
1) Cash is received by a person other than the one responsible for maintaining receivable records.
2) the person responsible for recieving cash prepares a list of cash recieved and gives that list to the person responsible for maintaining the accounts receivable records
3) all cash receipts are deposited to the bank account daily.
4) Cash deposit slips are approved by senior person who is not involved in maintaining the accounts receivable records
What is cost of control?
> the extent of internal controls will vary based on the nature in size of the organization.
> The cost of implementing the internal controls must not exceed their benefits.
> Where the cost is excessive, alternative, compensating control, should be devised..
What are the two limitation of internal control??
> human error
fraud
What is human error considered and what is it caused by?
> unintentional
it is caused by negligence, fatigue, missed judgment, confusion.
What is fraud?
> fraud is the intent to defeat internal controls for personal gain. This usually requires collision..
What are the 5 warning signs of missing or poor internal controls?
> accounting records - this would include an increase in customer records, missing documents, differences between bank deposits, and cash, receipts, and delays in recording.
> employees - warning, signs include lifestyle changes, too close of a relationship with the suppliers, refusal to take vacation or sick, leave, high employee turnover in a particular area.
> cash/accounts receivable - excessive number of voids, discounts and returns, unauthorized bank accounts, sudden activity in a dormant banking account, customer complains that their receiving nonpayment notices, abnormal number of expense items, supplies, or reimbursement to one employee
> Payroll - inconsistent overtime hours for department, overtime charge during a slack., Overtime charge for employees who normally would not have overtime, budget, variations for payroll by department, employees with duplicate, Social Security numbers, names, and addresses, employees with inconsistent overtime hours for department, employees with few or no payroll deductions
> purchasing inventory - increasing number of complaints about products or service, increase in purchasing inventory, but no increase in sales, abnormal inventory shrinkage, payments to vendors who aren’t on the approved vendor list, high volume of purchases from new vendors, purchases that bypass normal procedures, vendors without physical addresses, vendor addresses matching employee addresses
What does management accounting do?
we analyze the data in a way that is most helpful and allows us to make strategic decisions
