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Academic

PowerPoint

Internal Control

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Accountant’s Role

• Accountant’s role in the 21st century includes:

– Preparing the accounts and annual reports.

– Forecasting and budgeting.

– Analysing and interpreting data.

– Providing management with information for

decision making.

– Safeguarding the business to ensure

reasonable chance of long term success.

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Internal Control and Internal Check• Internal Control includes the following:

Auditing

(1) Administration & Management Control

(2) Accounting Control

Detailed Control Procedures for:

(1) Equity

(2) Assets

(3) Liabilities

(4) Expenses

(5) Income

(6) General

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Auditing

Auditing standards set out four objectives to ensure accounting control:

• (i) correct authorisation for appropriate business transactions.

• (ii) accounting records from the transaction to the final reports are executed in the appropriate manner while maintaining promptness and accounting policy.

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Auditing

• (iii) Access to assets is permitted only in

accordance with management authorization.

• (iv) Steps are taken to ensure recording of

assets and the existence of the assets are

compared at regular intervals and

safeguards are instituted to minimise

any differences.

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Auditing

Auditing recognises two major divisions of

internal control:

– (1) Administration and Management Control

and

– (2) Accounting Control

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1 Administration and Management Control

• Is primarily concerned with promoting

operational efficiency and maintaining

management policy.

• Areas include quality control and

evaluating individual performances.

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1 Administration and Management Control

• Each firm must set controls for their particular

business.

• However there are five common principles:

– (i) Management Leadership

– (ii) Organisational Structure

– (iii) Management Supervision

– (iv) Personnel

– (v) Business Circumstances

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1 (i) Management Leadership

• A positive and favourable control environment is

the responsibility of management.

• Senior management must be seen to be

accountable and adhering to controls,

otherwise general workforce will

have little respect for controls or

policies of management.

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1 (ii) Organisational Structure

• There needs to be an overall framework of

planning, co-ordination and control.

• Organisational structure will depend on the size

and nature of the business.

• Job descriptions, departmental

roles, and general procedures

and policies need to be known

by all staff.

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1 (iii) Management Supervision

• The overall supervision of internal control is the

responsibility of management.

• The supervision might include:

– on-going daily routines

– spot checks

– regular inspections

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1 (iv) Personnel

• If the quality and integrity of the personnel is not

of the highest standard, then the system they

work within has little value for control.

• Individuals with responsibility need to have the

appropriate training and experience to fulfill their

roles efficiently and effectively.

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1 (v) Business Circumstances

• Depending on the size of the business and its

location (branches, subsidiaries), it is important

that uniformity of controls and procedures are

maintained.

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2 Accounting Control

Accounting Control has three major areas of

concern:

– (i) Effective internal accounting

control system

– (ii) Safeguarding of assets

– (iii) Maintaining reliable financial

information

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2 (i) Effective Internal Accounting

Control SystemTo have an effective internal accounting control

system, there are six major principles:

– (a) Segregation of Incompatible Functions

– (b) Authorisation Procedures

– (c) Documentation Procedures

– (d) Accounting Records and Procedures

– (e) Physical Control

– (f) Independent Internal Verification

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2 (i) (a) Segregation of Incompatible

Functions

• Division of duties should

be assigned where the role

of one individual can be

cross checked with the

work duties of another

employee.

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2 (i) (b) Authorisation Procedures

• Basically only individuals

delegated with authority from

management can act on

certain transactions.

• For example, only the Purchasing

Officer has access to the stock

order book for requisitions of

goods.

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2 (i) (c) Documentation Procedures

• Proper documentation is maintained to provide

evidence of transactions.

• Distinct roles defined; pre-numbered documents

used and safe storage of paper work is kept for

the required length of time.

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2 (i) (d) Accounting Records and

Procedures• Transactions are processed promptly

and accurately while also preparing timely reports and data when required by the appropriate users.

• Accounting procedures, personnel and documentation are all-important aspects for control and supervision.

• All systems need to be reviewed.

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2 (i) (e) Physical Control

• Security is necessary over the actual equipment,

records, and unused documents (access) as well

as security over the users of the equipment,

records and documents.

• Random checks of all items should be carried

out.

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2 (i) (f) Independent Internal

Verification

• Reviewing the accuracy and propriety of an

employee’s work by another employee is one of

the basic principles of internal control.

• This might include checking, for example, the till

tape total with the day’s takings.

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2 (ii) Safeguarding of Assets• There are six major areas needing control and checking

involving assets. Assets are the main area that is open

to theft and embezzlement.

– (a) Accounts Receivable

– (b) Inventory

– (c) Cash Inflow

– (d) Cash Outflow

– (e) Non-Current Assets

– (f) General

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2 (ii) (a) Accounts Receivable• Before credit is granted to clients, there should be

some investigation of their ability to meet their

commitments e.g. check references.

• Credit limits should be enforced.

• Prompt invoicing and monthly

statements.

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2 (ii) (a) Accounts Receivable

• Review ageing of Accounts

Receivable and Allowance for

Doubtful Debts

• Interest on outstanding accounts or

discounts for early payment

• Control Accounts and Subsidiary

Ledgers

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2 (ii) (b) Inventory• Periodic or perpetual

inventory control system

• Purchasing officer reliable

and trustworthy

• Credit limit on the

Purchasing Officer authority

• All order forms in numerical

order

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2 (ii) (b) Inventory

• Store Receiving Officer checks quality and quantity of the goods received – Goods Received Report

• Purchasing Officer and Store Receiving Officer are in different locations in the business

• Regular checks of three key documents: Order Form, Goods Received Report and Invoice Received

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2 (ii) (c) Cash Inflow including credit

cards and cheques

• Receipts issued wherever possible, in numerical order

• Daily banking (intact) and vary the banking times

• Money kept on the premises in a safe and secured

location

• Independent checks carried out on till tape and money

totals

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2 (ii) (c) Cash Inflow including credit

cards and cheques

• All incoming mail opened in the presence of at

least two staff members

• All cheques received stamped with the business

name and dated

• Multi-column cash journals

maintained

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2 (ii) (d) Cash Outflow

• All major payments should be made by cheque and require dual signatures for authorization.

• Cheques issued in numerical order and marked with “Not Negotiable”

• Multi-column cash journals maintained

• Remittance advice forwarded with cheques

• Small payments should be handled through a Petty Cash Imprest System

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2 (ii) (e) Non-Current Assets

• Control over non-current assets including purchasing, maintenance, recording, storing, access and disposal.

• Subsidiary ledger and registered asset cards.

• Correct personnel allocated responsibility.

• Capital Expenditure Officer has a long term plan including maintenance, planned up-grading and possible expansions for the business.

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2 (ii) (e) Non-Current Assets

• Storage or replacement of Non-Current Assets will vary from item to item.

• Assets like a photocopier will be left in one location, however assets like a portable personal computer can be moved from office to office and to home.

• Added security is needed on portable assets, plus adequate insurance cover is important.

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2 (ii) (f) General

• Regular Bank Reconciliation Statements

• Staff receiving weekly wage packets, hours worked

can be verified and supported.

• If cash is issued for wages, then each employee

must sign for their own wage packet

• Spot checks carried out on all procedures

• Rotation of duties

• Cash Budgets and Performance Reports prepared

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2 (iii) Maintaining Reliable Financial

Information

• It is essential that the procedures and controls

are able to maintain accurate and reliable data.

• The accurate and reliable data is used to

prepare the financial statements

and reports for management.

• Management will use the

statements and reports for

decision making purposes.

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Detailed Control Procedures

1 – Equity - Capital• The owner/s need to invest adequate

capital to float the business

• The capital must also maintain a satisfactory level of resources to allow the organisation to grow and operate productively.

• Outside finance groups will provide little assistance if the proprietor/s is not willing to take some personal risk - gearing

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Detailed Control Procedures

1 – Equity - Drawings

• Drawings are the withdrawal of assets by the

owner/s for personal use when a profit is

anticipated.

• Too much cash withdrawal can place

liquidity pressure on the entity

• Drawings should only be taken when

profits are a true likely outcome.

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Detailed Control Procedures

2 – Liabilities - Finances• Finance – it is normal for a business to obtain

financial assistance from outsiders, whether for short term or long term projects.

• It is important that the type of finance be appropriate for the assets being acquired.

• Long term finance for long term project e.g. Mortgage for Land and Buildings

• Short term finance for short term project e.g. Overdraft for Inventory purchases

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Detailed Control Procedures

2 – Liabilities – Accounts Payable

• A reliable Purchasing Officer

who can make wise buying

decisions e.g. maximise

discounts, delay payments to

avoid interest or overdraft

penalties

• Credit limits applied to

Purchasing Officer as well

as a division of duties

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Detailed Control Procedures

3 - Expenses• One way to maximise profits is to

minimise expenses.

• Divide the business into areas of activities or departments and make the sectional head responsible for their spending and budget.

• Examine purchases carefully. Checks like matching original orders with goods received reports and invoices received is vital.

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Detailed Control Procedures

4 - Income• Income is the cornerstone of any

successful business. It is critical that this area be monitored closely.

• Budgets are normally the first step in planning income expectations.

• Cash sales/services – receipts issued and daily banking.

• Credit sales/services – credit checks, credit limits, prompt invoicing, discounts and interest penalties are all important agents.

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Detailed Control Procedures

5 – General - Staffing

• Staffing – when employing staff, it is critical that

references are followed through and

qualifications are checked.

• Staffing records should be brought up to date

regularly.

• All staff should be reviewed and

evaluated annually.

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Detailed Control Procedures

5 – General - Computer• It is critical that secure measures are taken

to safeguard the computer system.

• Several aspects need to be considered: hardware reliability, back-up procedures, physical security of data (generation back-ups) and the detections and preventions of fraud, errors and viruses.

• Correct staffing and high security access to sensitive data kept on the computer e.g. passwords, pin-numbers or access cards.

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Reference

• Material used in the PowerPoint slides and worksheets

have been reproduced from the following references

with full permission:

• Financial Accounting One, Two, Three and Four

Accounting 2007

- Ashley Doyle