8.3 Purposes Of Internal Control Flashcards
What are the purposes of internal controls?
To safeguard assets, ensure accurate recording of business transactions, and comply with laws and regulations.
What is an example of internal control?
Authorisation
Custody of cash
Segregation of duties.
Bank reconciliation
Remember ACS(BR)
How does segregation of duties help in internal controls?
It prevents employees from using business assets illegally for personal gain.
Can internal controls completely prevent fraud?
No, employees may still collude and find ways around them.
What is the definition of fraud?
Fraud involves deliberate deception to obtain unjust financial gain.
Where can you test your knowledge on the purposes of internal controls?
[o.gov.sg/sls-poa0802]
(http://go.gov.sg/sls-poa0802)
Give an example of a segregation of duties, i.e. when duties are performed by different employees.
The accounts clerk will write a cheque and prepare the source documents needed to support a payment to a supplier.
The manager will verify the authenticity of the source documents and authorise the payment.
What is a risk when duties are performed by one employee?
The accounts clerk can create a fictitious supplier and write a cheque to themselves.
Example: ‘LET’S SEE … THIS INVOICE IS CREATED TO PAY MYSELF. LET ME WRITE A CHEQUE NOW!’
What is the role of the manager in cheque authorisation?
The manager will verify the authenticity of the source documents and authorise the payment.
Example: ‘MR TAN HAS AUTHORISED THIS PAYMENT. PLEASE CHECK AND SIGN ON THE CHEQUE TO APPROVE THE PAYMENT TO THIS SUPPLIER.’
What can happen if there is no countercheck in the payment process?
The accounts clerk may siphon off money to a fictitious supplier.
Example: ‘TIME TO GET THAT EXPENSIVE BAG!’
Why is cash considered highly portable?
Currency notes and cheques are light and small, making them easy to move from their original location.
What does it mean when cash is misappropriated by employees?
Employees intentionally use the business’ cash for their own use or other unauthorised purposes.
What happens when duties are segregated?
It helps to detect and detect the occurrence of fraud although employees may still collude and find a way around it.
What could happen when duties are performed by one employee and there is no one to countercheck?
The accounts clerk can create a fictitious supplier and write a cheque to themselves.
Example: ‘LET’S SEE … THIS INVOICE IS CREATED TO PAY MYSELF. LET ME WRITE A CHEQUE NOW!’
What is the role of the manager in cheque authorisation?
The manager will verify the authenticity of the source documents and authorise the payment.
Example: ‘MR TAN HAS AUTHORISED THIS PAYMENT. PLEASE CHECK AND SIGN ON THE CHEQUE TO APPROVE THE PAYMENT TO THIS SUPPLIER.’
What can happen if there is no countercheck in the payment process?
The accounts clerk may siphon off money to a fictitious supplier.
Example: ‘TIME TO GET THAT EXPENSIVE BAG!’
What does it mean when cash is misappropriated by employees?
Employees intentionally use the business’ cash for their own use or other unauthorised purposes.
What is segregation of duties in internal control?
It involves separating cash handling and cash recording duties among different employees to prevent any single person from having control over the entire cash process.
Examples include having different employees receive and deposit cash, authorise invoices for payment, and write and authorise cheques.
What are good practices for custody of cash?
Secure cash and cheques in locked storage, limit access to authorised personnel, and deposit cash daily to minimise overnight cash at the business location.
Access should be controlled through combinations, passwords, or other access codes provided only to authorised personnel.
What is required for authorisation of payments?
Obtain proper approvals for all payments from authorised personnel, requiring at least two persons to review and approve all payments and valid supporting documents for all payments.
What is bank reconciliation?
It involves comparing the business’ records with the bank’s records to identify discrepancies between the ending balances in the business cash at bank account and the bank statement.
Items to identify include direct deposits, direct payments, cheques not yet presented, deposits in transit, dishonoured cheques, and errors made by the business or the bank.
What is the purpose of internal controls?
Although not fool-proof, internal controls safeguard a business’ cash.
What are source documents?
Source documents provide proof that transactions have occurred.
