HFT 3431HFT 3431

Chapter 12Chapter 12

Internal ControlInternal Control

Internal ControlInternal Control

• What Is Internal Control?What Is Internal Control?

• What Are the Major Objectives of What Are the Major Objectives of Internal Control?Internal Control?

• What Are the Differences Between What Are the Differences Between Accounting and Administrative Accounting and Administrative Controls?Controls?

Internal ControlInternal Control

• What Are the Characteristics or What Are the Characteristics or Principles of Internal Control?Principles of Internal Control?

• How Are Internal Controls How Are Internal Controls Documented?Documented?

Internal ControlInternal Control

• How Is Flowcharting Useful in How Is Flowcharting Useful in Documenting and Monitoring Internal Documenting and Monitoring Internal Control?Control?

• How Does the Segregation of Duties How Does the Segregation of Duties Enhance Internal Control?Enhance Internal Control?

• What Methods of Internal Control Are What Methods of Internal Control Are Necessary to Safeguard Cash?Necessary to Safeguard Cash?

Conditions For Fraud and Conditions For Fraud and EmbezzlementEmbezzlement

• NeedNeed

• OpportunityOpportunity

• Failure of ConscienceFailure of Conscience

The Industry’s VulnerabilityThe Industry’s Vulnerability

• Cash BusinessCash Business

• Many TransactionsMany Transactions

• Low Skill EmployeesLow Skill Employees

• Perception of Industry As Low Social Perception of Industry As Low Social StatusStatus

The Industry’s VulnerabilityThe Industry’s Vulnerability

• Items Used Have “Street Value”Items Used Have “Street Value”

• Items Used Are Used by General Items Used Are Used by General PopulationPopulation

AICPA Objectives of Internal AICPA Objectives of Internal ControlControl

• Safeguard AssetsSafeguard Assets

• Check Accuracy and Reliability of Check Accuracy and Reliability of Accounting DataAccounting Data

• Promote Operational EfficiencyPromote Operational Efficiency

• Encourage Adherence to Prescribed Encourage Adherence to Prescribed Managerial PoliciesManagerial Policies

Types of Internal ControlTypes of Internal Control

• Administrative - How the Company Administrative - How the Company OperatesOperates

• Accounting - Impact on Financial Accounting - Impact on Financial StatementsStatements

Internal Control BasicsInternal Control Basics

• System Requires - Methods and System Requires - Methods and Procedures; and Reliable Procedures; and Reliable Forms/reportsForms/reports

• Larger the Company - More Internal Larger the Company - More Internal Control RequiredControl Required

Internal Accounting ControlInternal Accounting Control

• Develop Long-Term Audit Program Develop Long-Term Audit Program

• Set Audit PoliciesSet Audit Policies

• Conduct Financial AuditsConduct Financial Audits

• Recommend ImprovementsRecommend Improvements

• Check Management for ComplianceCheck Management for Compliance

• Review Operational ControlsReview Operational Controls

Internal Accounting ControlInternal Accounting Control

• Monitor Corrective Actions TakenMonitor Corrective Actions Taken

• Conduct Special Examinations of Conduct Special Examinations of “Sensitive” Areas“Sensitive” Areas

• Investigate FraudInvestigate Fraud

• Assist the Audit CommitteeAssist the Audit Committee

• Coordinate With Independent CPA Coordinate With Independent CPA FirmFirm

Classification of ControlsClassification of Controls

Preventive ControlsPreventive Controls

• Controls That Are Implemented Controls That Are Implemented Before a Problem Occurs Such As: Before a Problem Occurs Such As: Use of Locks or Segregation of Use of Locks or Segregation of DutiesDuties

Classification of ControlsClassification of Controls

Detective ControlsDetective Controls

• Controls Designed to Discover Controls Designed to Discover Problems and to Monitor Preventive Problems and to Monitor Preventive Controls Such As External Audits or Controls Such As External Audits or Surprise Cash AuditsSurprise Cash Audits

Characteristics of Internal Characteristics of Internal ControlControl

• Management LeadershipManagement Leadership

• Organizational StructureOrganizational Structure

• Sound PracticesSound Practices

• Fixed ResponsibilityFixed Responsibility

Characteristics of Internal Characteristics of Internal ControlControl

• Limited AccessLimited Access

• Competent and Trustworthy Competent and Trustworthy PersonnelPersonnel

• Segregation of DutiesSegregation of Duties

• Authorization ProceduresAuthorization Procedures

Characteristics of Internal Characteristics of Internal ControlControl

• Adequate RecordsAdequate Records

• Procedure ManualsProcedure Manuals

• Physical ControlsPhysical Controls

• Budgets and Internal ReportsBudgets and Internal Reports

• Independent Performance ChecksIndependent Performance Checks

Documenting Internal Documenting Internal ControlControl

• FlowchartingFlowcharting

• Internal Control QuestionnaireInternal Control Questionnaire

• NarrativeNarrative

Code of EthicsCode of Ethics

• Many Hospitality Companies Have Many Hospitality Companies Have Adopted Code of EthicsAdopted Code of Ethics

• General Managers and Department General Managers and Department Heads are Responsible for Advising Heads are Responsible for Advising Employees Under Their Supervision Employees Under Their Supervision of the Parts of the Code That Apply of the Parts of the Code That Apply to Them and Their Dutiesto Them and Their Duties

Most Frequent Elements in Most Frequent Elements in Codes of EthicsCodes of Ethics

• Privacy of CommunicationPrivacy of Communication

• Conflict of InterestConflict of Interest

• Political Contributions in the U.S.Political Contributions in the U.S.

• Company RecordsCompany Records

• Gifts, Favors, Entertainment, Trips Gifts, Favors, Entertainment, Trips and Outingsand Outings

Most Frequent Elements in Most Frequent Elements in Codes of EthicsCodes of Ethics

• Use of Company AssetsUse of Company Assets

• Anti-Trust LawsAnti-Trust Laws

• Relations With CompetitorsRelations With Competitors

• Relations With SuppliersRelations With Suppliers

• Relationships With CustomersRelationships With Customers

Examples of Internal Examples of Internal ControlControl

• CashCash– Bank accounts reconciled monthlyBank accounts reconciled monthly– Reconciliation done by independent Reconciliation done by independent

partyparty– General Cashier needs to take a General Cashier needs to take a

vacation 1 - 2 times a yearvacation 1 - 2 times a year– Surprise cash countsSurprise cash counts– Checks received should be endorsedChecks received should be endorsed

Examples of Internal Examples of Internal ControlsControls

• Accounts ReceivableAccounts Receivable– Same person collects money does not Same person collects money does not

record paymentrecord payment– Mgmt authorizes and write-offs or Mgmt authorizes and write-offs or

adjustmentsadjustments• Accounts PayableAccounts Payable– Need invoice to payNeed invoice to pay– Invoices need to match to POInvoices need to match to PO– Vendor must in systemVendor must in system

Examples of Internal Examples of Internal ControlsControls

• PurchasingPurchasing

– PO system needs to be usedPO system needs to be used

– Separate duties for Ordering and Separate duties for Ordering and ReceivingReceiving

• PayrollPayroll

– Spvr or Mgr need to approve time sheetsSpvr or Mgr need to approve time sheets

– Payroll separate from HRPayroll separate from HR

– Undelivered checks returned to CFOUndelivered checks returned to CFO

Examples of Internal Examples of Internal ControlsControls

• InventoriesInventories– Keep valuables locked awayKeep valuables locked away– Keep minimal level on handKeep minimal level on hand– Take a physical inventory periodicallyTake a physical inventory periodically• Use 2 or more staff to do inventoryUse 2 or more staff to do inventory

• Fixed AssetsFixed Assets– Annual inventoryAnnual inventory– Proper approvals prior to purchase or Proper approvals prior to purchase or

disposaldisposal