ACCT 3122- Internal Controls Flashcards
accounting information systems provides information about….
assets, liabilities, equity and income statement accounta
control are:
policies and procedures a company uses to ensure that the quality of its AIS’s inputs, outputs and processes are not compromised
internal controls are the methods a business uses to
safeguard assets, provide accurate and reliable information, promote and improve operational efficiency
internal control limitations
1) possibility of error
2) circumvention
3) management override
4) changing conditions
possibility of error
no system is perfect; someone may forget to perform the internal control
circumvention
personnel may circumvent the system through collusion or other means
management override
management can override control procedures or by directing a subordinate to do so
changing conditions
conditions may change over time (ex: growing from one location to two locations) so that existing controls become ineffectual
internal controls are designed to reduce the likelihood of:
errors or fraud in an information system
companies have multiple controls to prevent the theft of cash (2 kinds)
1) only certain individuals are allowed to sign checks
2) at end of the month, an independent person performs a bank reconciliation
section 404 of the Sarbanes Oxley Act requires management to
1) Accept responsibility for the effectiveness of the company’s internal control over financial reporting.
2) Evaluate the effectiveness of the company’s internal control over financial reporting using suitable control criteria.
3) Supporting its evaluation with sufficient evidence, including documentation
4) Presenting a written assessment about the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year.
categories of internal controls:
1) authorization of transactions
2) segregation of duties
3) access controls
4) human resource controls
5) adequate documents
6) independent checks of performance
authorization:
process of reviewing and approving transactions or operations
general authorization:
management authorizes employees to perform certain activities and to execute certain transactions within limits set by a policy
what internal control is this an example of? Sales personnel have the authority to make sales to customers that are within the customer’s credit limit. Someone in the shipping department or purchasing department does not have authorization to make a sale.
general authorization
specific authorization
case-by-case decisions associated with nonroutine transactions. A manager must authorize any particular deviation from the limits set by general authorization
what is this an example of?
A salesperson cannot complete a sale that would exceed the customer’s credit limit. A sale exceeding the customer’s credit limit would require management approval.
specific authorization
what are these examples of? credit limits for customers; maximum spending limits for employees; purchasing limits for employees
general authorization of transactions
specific authorization of transactions involves what
reviewing supporting documentation, question unusual items and make sure that necessary information is present to justify the transaction before they approve it
proper procedures for authorization
1) approval should be linked to specific dollar levels
2)signing blank forms should never be allowed
3) under NO circumstances should someone be allowed to approve transactions on someone elses behalf
4) the person initating a transaction should not be the person who approves the transaction
5) company’s approval policies should be specified in a procedures manual
segregation of duties serves 2 key purposes
1) it ensures that there is oversight and review to catch errors
2) reduces fraud or theft because it requires 2 people to collude to hide a transaction
effective segregation of duties achieved when following are seperated
1) authorization
2) record keeping
3) custody
authorization-
approving transactions and decisions
record keeping-
preparing source documents; maintaining journals, ledgers or other files; preparing reconciliations; and preparing performance reports
custody-
handling cash, maintaining an inventory storeroom, or receiving incoming customer checks
collusion-
risk that two or more employees could act together to undermine the functioning of internal controls
access controls ensure that only authorized personnel have access to the company’s assets to protect against:
misappropriation, damage or theft
access to assets can be _______ or ________
direct; indirect
direct access controls:
controls that safeguard cash, inventory, fixed assets (ex: safes, alarms)
indirect access controls:
protect the records and documents that control the use, ownership, and disposition of assets (ex: computer passwords, computer backup systems, etc)
human resource controls:
controls to assure that employees conform to regulations and standards of the company
bonding in regards to HR controls:
obtaining insurance protection against theft by employees; typically used when the employees have access to money or valuables
conducting background checks is a form of what internal control?
human resource controls
adequate documents and records provide evidence that
management’s policies and procedures, including internal control procedures, are being carried out by employees
audit trail in regards to adequate documents and records
presents verifiable information about the accuracy of accounting records
the bill of lading document indicates that
goods have shipped
the sales invoice indicates that
company has billed the customer
this is an example of what? Ray Kramer’s signature on the customer purchase order – Signifies that the customer’s credit has been approved
adequate documents and records
this is an example of what? Jim Adam’s initials on the sales invoice – Signifies that he has reviewed the invoice for accuracy.
adequate documents and records
prenumbered documents help to:
1) prevents transactions from being recorded more than once
2) prevent transactions from not being recorded at all
3) locate documents when they need to be retrieved later
chart of account is an example of what internal control?
adequate documents and records (its basically a filing sys for your transactions to ensure they are organized properly and can be found later
Independent checks on performance:
reviews carried out by employees who did not do the work to ensure the reliability of accounting information and the efficiency of operations
this is an example of which internal control? Bank reconciliations to verify that the bank balance reconciles with the book balance.
independent checks of performance
this is an example of which internal control? crossfooting a journal
independent checks of performance
this is an example of which internal control? Counts of inventory by an independent team during the periodic inventory count.
independent checks of performance
purpose of independent checks is to ensure:
record keeping is done accurately, completely and honestly
this is an example of what?
When the government started requiring banks to report interest income to the IRS, interest income reported on individual tax returns increased by $8 billion.
independent checks of performance
