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Internal Control

Internal Control. ATG 383, Chapter 8 Spring 2002. Introduction. Define internal control Who is responsible for control. Why is control important?. Internal Control is …. The steps a company takes to prevent employee fraud. True. False. Internal Control is ….

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Internal Control

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  1. Internal Control ATG 383, Chapter 8 Spring 2002

  2. Introduction • Define internal control • Who is responsible for control. • Why is control important?

  3. Internal Control is ….. The steps a company takes to prevent employee fraud. True False

  4. Internal Control is ….. • What you do to provide reasonable assurance you will achieve your objectives.

  5. Who is responsible for internal control? Everyone has a part! • Board of directors • Management • Employees

  6. Why is internal control important? • Management has a fiduciary responsibility to establish controls. • Go to jail. • Foreign Corrupt Practices Act • Get shut down.

  7. Ways to categorize controls Problem: Web site is hacked • Prevent • Detect • Correct

  8. Ways to categorize controls Problem: Employees not qualified • Prevent • Detect • Correct

  9. Ways to categorize controls • General • Application

  10. Components of Internal Control Monitoring Information & Communication Control Activities Risk Assessment Control Environment

  11. Control Environment • The following slides provide examples, both good & bad, of the control environment’s components.

  12. Components of Control Environment Penn Square’s assets doubled every two years. The chief loan officer was known for wearing his Mickey Mouse hat and drinking beer from cowboy boots.

  13. Components of Control Environment During orientation, company policies are explained. Each employee is given a policy manual

  14. Components of Control Environment This group is composed of business professionals who are not employees of the company. E.F. Hutton, used the owner’s granddaughter, an actress.

  15. Components of Control Environment At E.F. Hutton, branch managers received 10% of the interest profits as a year-end bonus. Managers were encouraged to be creative so as to increase profitability.

  16. Components of Control Environment At Sumitomo Corp, the chief copper trader could execute off-the-books trades without special approval, resulting in $1.8 billion loss.

  17. Components of Control Environment In order to maintain deposit insurance, banks must comply with the Federal Deposit Insurance Corporation’s standards.

  18. Components of Control Environment At Lincoln Savings, the president’s salary was $1 million. Age = mid-twenties. Prior experience = owner’s son & busboy.

  19. Components of Internal Control Monitoring Information & Communication Control Activities Risk Assessment Control Environment

  20. Risk Assessment (2nd component) Why have risk assessment?

  21. Risk Assessment • How do you manage potential problems? • Fig 8.3 (p. 270) & Table 8.4 (p. 273) illustrate this process.

  22. Risk Assessment Example • Assume 260 processing runs per year. • Cost to reprocess data: $5,000 • Frequency of reprocessing: 1% • Cost of control: $30,000 • 3 year expected life • New frequency of reprocessing: .001%

  23. Components of Internal Control Monitoring Information & Communication Control Activities Risk Assessment Control Environment

  24. Control Activities (3rd component) • Policies and rules that provide reasonable assurance that management’s control objectives are achieved. • 5 categories - p. 261

  25. Proper Authorization • Specific authorization • General authorization

  26. Segregation of Duties

  27. Segregation of Duties

  28. Segregation of Duties

  29. Segregation of Duties

  30. Remaining control activities • Adequate documents and records • Safeguards over assets and records • Independent checks on performance

  31. Batch Totals

  32. Components of Internal Control Monitoring Information & Communication Control Activities Risk Assessment Control Environment

  33. Monitoring (4th component) • Ongoing evaluations - during the normal course of operations. • Separate evaluations - a “fresh pair of eyes” such as internal auditing. • Information from external parties.

  34. Monitoring

  35. Review to now • Establish good control environment • Assess risk • Install control activities • Monitor internal control to be sure that • Risks are addressed. • Controls are properly designed and operating effectively.

  36. Components of Internal Control Monitoring Information & Communication Control Activities Risk Assessment Control Environment

  37. Information and Communication • Characteristics of an effective accounting information system?

  38. Information & Communication(5th comp.) • Good internal control requires that information be identified, captured, and communicated in a form and timeframe that enables people to carry out their jobs. Today’s Headlines

  39. Information example • Convenient Foods Stores - accounting system could not handle rapid growth • Number of stores increased from 1,050 to 1,400 in two years. • Original report of income: $2.5 M • July - revised to $80 K • October - revised to ($2.0) M

  40. Summary - Internal Control has 5 components • Control Environment • Risk Assessment • Control Procedures • Monitoring • Information and Communication

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