03. Internal Control and Asset Management

Question 1

What is the definition of Asset Management?

Answer 1

The organisation of assets to achieve KPIs (sales, goals, expense goals, etc.)

Question 2

What is the definition of Internal Control?

Answer 2

What processes have to be implemented to enhance efficiency and safeguard assets against theft, fraud and inconsistencies.

Question 3

What is the importance of the Management of Cash?

Answer 3

• amount of cash available needs to be sufficient for the business to meet its operating needs and pay its operating expenses
• the business could be recording high profits through credit sales; however if this is not translated into the receipt of cash, the business may not be able to pay the daily expenses required to continue running
• Too little: liquidity problems; unable to pay obligations as they fall due
• Too much: could be utilised better elsewhere e.g. invested

Question 4

What is the importance of the Management of Equity?

Answer 4

• equity financing involves obtaining funds from owners, often by issuing new shares to existing and/or new shareholders
• the higher the debt-to-equity ratio, the higher the risk for creditors and owners
• if a business is unable to repay its debt, then creditors may take control of the business
• too much debt financing puts the business at risk due to the potential difficulty in meeting interest and principal repayment
• Too little: Increases reliance on debt (and increase interest expenses)
• Too much: Dilutes ownership and control among shareholders

Question 5

What is the importance of the Management of Inventory?

Answer 5

• when maintaining inventory, if the type of quantity is incorrect this can result in slow-moving items or stock being out of date or deteriorating
• to ensure a good inventory turnover and to keep costs to a minimum, it is necessary to have appropriate reorder points and reorder quantities and to take advantage of bulk purchase and discounts
• Too little: fail to meet customer demand
• Too much: inventory become obsolete

Question 6

What is the importance of the Management of Non-Current Assets?

Answer 6

• non-current assets are usually expensive and require financing through long-term debt and/or equity
• this area needs to be managed very well as the asset purchase cannot be reversed over time, the acquisition involves a large sum of money and it is geared to the long term
• this results in a degree of uncertainty as to future economic conditions and the ability to pay back debt
• Too little: a loss of sales / can’t meet demand
• Too much: inefficient use of resources

Question 7

What is the importance of the Management of Accounting Receivable?

Answer 7

• the amount of credit arrangements with financial institutions, needs to be sufficient for the business to meet its operating needs and pay its operating expenses
• the most common reason for poor liquidity is management allowing accounts receivable to become overdue
• Too little: Overly strict credit policies can reduce sales.
• Too much: Ties up cash in receivables, reducing liquidity, bad debts risk

Question 8

What is the importance of the Management of Accounts Payable?

Answer 8

• a business must be careful when purchasing assets to ensure that their cash flow is sufficient to avoid missing payments
• in the case of being unable to pay, the company is liable of falling insolvent
• to avoid this, the company should review all GPFR monthly so that management can plan to pay back debts
• Too little: Limits growth and expansion opportunities
• Too much: Increases interest obligations- liquidity issues

Question 9

What are the 8 principles of Internal Control?

Answer 9

• Segregation of Duties
• Established lines of responsibility
• Security of assets
• Mechanical and electronic devices
• Records and Documentation
• Verification and checking processes
• Authorisation processes
• Competent and reliable staff