Elements of Internal Control
1. 2. 3. 4. 5. Control environment Risk assessment Control procedures Monitoring Information and communication
Control Procedures
Date
2006 1 Mar. 2 2
Page 35
Post Ref. Accts. Rec. – Debit Fees Earned – Credit
Elements of Internal Control
1. 2. 3. 4. 5. Control environment Risk assessment Control procedures Monitoring Information and communication
Elements of Internal Control
recorded in BUYING
Revenue journal
Cash receipts journal
Receipt of cash from any source
Purchase of items on account recorded in
Purchases journal
Payment of cash for any purpose
Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for Related Operations Separating Operations, Custody of Assets, and Accounting Proofs and Security Measures
Separating Otherwise, the following Responsibilities for abuses are possible: Related Operations 1. Orders may be placed on the basis of
friendship with a supplier, rather than on price, quality, and other objective factors. 2. The quantity and quality of supplies received may not be verified, thus causing payment for supplies not received or poor-quality supplies. 3. Supplies may be stolen by the employee. 4. The validity and accuracy of invoices may be verified carelessly.
Clues to Potential Problems
Warning signs from the accounting system: 1. Missing documents or gaps in transaction numbers. 2. An unusual increase in customer refunds. 3. Differences between daily cash receipts and bank deposits. 4. Sudden increase in slow payments. 5. Backlog in recording transactions.
Basic Accounting System
Analysis
Design
Implementation
Objectives of Internal Control
To provide reasonable assurance that:
1. assets are safeguarded and used for business purposes. 2. business information is accurate. 3. employees comply with laws and regulations.
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Chapter 5
Accounting Systems and Internal Controls
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting Pepperdine University
recorded in
Cash payments journal
The Revenue Journal
Revenue Journal
Date Invoice No. Account Debited Post Ref.
Page 35
Accts. Rec. – Debit Fees Earned – Credit
12
A
Supplies 14
B
C
D
Accounts itor Accounts
Accts. Pay.
21 A
B
C
D
Special Journals
SELLING Providing services on account
recorded in
1 2 3
1 2 3
4
5 6
4
5 6
All sales on account are recorded in this journal. Each sales invoice is listed in numerical order.
The Revenue Journal
Revenue Journal
Control Procedures
Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for Related Operations Separating Operations, Custody of Assets, and Accounting Proofs and Security Measures
Clues to Potential Problems
Warning signs with regard to people:
1. Abrupt changes in lifestyle. 2. Close social relationships with suppliers. 3. Refusing to take a vacation. 4. Frequent borrowing from other employees. 5. Excessive use of alcohol or drugs.
1. 2. 3. 4. 5. Control environment Risk assessment Control procedures Monitoring Information and communication
Management philosophy and operating style influences the control environment.
Elements of Internal Control
1. 2. 3. 4. 5. Control environment Risk assessment Control procedures Monitoring Information and communication
Once risks are identified, they can be analyzed to estimate their significance, to assess their likelihood of occurring, and to determine actions that will minimize them.
Objectives
4. Describe and give examples of additional subsidiary ledgers and modified special journals. 5. Apply computerized accounting to the revenue and collection cycle. 6. Describe the basic features of ecommerce.
Manual Accounting Systems
General Ledger and Subsidiary Ledgers
General Ledger
Cash
11
Accounts Receivable Subsidiary Ledger Customer Accounts
Accts. Rec.
Objectives
1. Define an accounting system and After studying this describe its implementation. chapter, you should 2. List the three objectives of internal control, be able to: and define and give examples of the five elements of internal control. 3. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals.