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INTERNAL CONTROL

INTERNAL CONTROL. Internal Control is the process that management designs and implements to help an organization achieve: Reliable Financial Reporting Effective and efficient operations Compliance with relevant laws and regulations. Who is Responsible for Internal Controls?.

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INTERNAL CONTROL

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  1. INTERNAL CONTROL Internal Control is the process that management designs and implements to help an organization achieve: Reliable Financial Reporting Effective and efficient operations Compliance with relevant laws and regulations.

  2. Who is Responsible for Internal Controls? Management is responsible for Internal Control. Management must determine the business risks that threaten the achievement of any of these objectives, it must create and implement control activities and it MUST ensure that the controls are monitored. A company’s accounting system is part of Internal Control.

  3. Control Activities: they are policies and procedures that help ensure the managements’ directions are followed. They are actions that must be taken to respond to risks that threaten the achievement of reliable financial reporting and effective and efficient operations Why should companies implement controls?

  4. 1.Establishment of Responsibility=Authorization Transactions and activities must be undertaken and approved by the appropriate individuals or departments. What do you interpret by the above statement? ----U know exactly who is doing what. The organization assigns duties and responsibilities to employees. For example: cashier. If there is a mistake in the total cash at the end of the day, the cashier will be responsible.

  5. Establishment of Responsibility Responsibility should be assigned to specific individuals or departments. Task: Give examples of departments. Control is most effective when only one person is responsible for a specific task. Do you agree with the above statement?

  6. 2. Segregation of Duties The work of one individual should provide a reliable basis for monitoring the work of another employee. Example: Activities related to sales: Selling, Shipping and Billing should be done by different individuals.

  7. Segregation of Duties The example shows the responsibility for related activities should be assigned to different individuals. Also the responsibility for establishing the accountability for an asset should be separate from the physical custody of that asset. Explain the above statement.

  8. Related Activities When one individual is responsible for all the related activities, the potential for errors and fraud increases. Why is this so? Activities, for example, related to purchasing: ordering, receiving and record payment should be performed by different individuals.

  9. 3. Custody of Assets:Safeguarding of Duties When one employee maintains the record of an asset and a different employee has physical custody the custodian is not likely to convert that asset to personal use. Give one example of the situation presented above.

  10. Custody of Assets The separation of accounting responsibilities for the custody of assets is especially important for cash and inventories because these assets are vulnerable to unauthorized use and theft. Discuss the above statement.

  11. 4. Documentation Procedures Documents should provide evidence that transactions and events have occurred. Give some examples of documents. Documents should be: Pre numbered, that is, documents are prepared in a sequential order therefore, transactions are not counted twice or omitted. Example: #1, #2, #3, #4, #5.

  12. 4. Documentation Procedures Documents should be prepared when transactions occur. Give an example. Source documents for accounting entries should be promptly forwarded to the accounting department.

  13. 5. Other controls: Physical Controls Physical Controls include mechanical and electronic controls to safeguard assets and improve the accuracy and reliability of the accounting records. Examples: safes, vaults, alarms, passwords.

  14. 6. Internal Review In large companies independent internal reviews are monitored by internal auditors. These are company employees who continuously evaluate the effectiveness of a company’s system of internal control.

  15. 6. Independent Verification: Internal Review Internal Control over financial reporting is so important to users of financial statements today that the Canadian Securities Administrators (CSA) now requires the chief executive officer and the chief financial officer to certify that they have evaluated the effectiveness of the company’s internal control over financial reporting. This must be reported in the company’s annual report and the evaluation process used must be described.

  16. Independent Verification: External Review External Auditors are professional accountants that are hired by the company to report on whether or not the company’s financial statements fairly presents its financial position and results of operations. They are not required to test the effectiveness of the company’s control’s.

  17. Other Controls Rotating employees’ duties. Getting insurance protection against the theft of assets by dishonest employees. This is known as bonding .

  18. Discussion What are the limitations of Internal Control?

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