CH7 Control And Accounting Information System

Question 1

What are Internal Controls?

Answer 1

Internal Controls are the processes implemented to provide reasonable assurance that the following objectives are achieved:

1. Safeguard assets - Prevent or detect unauthorised acquisition, use and disposition of organisation’s recourses.
2. Maintain records in sufficient details to report to company’s assets accurately and fairly.
3. Provide accurate and reliable information.
4. Prepare financial reports in accordance with established criteria.
5. Promote and improve operational efficiency.
6. Encourage adherence to prescribed managerial policies.
7. Comply with applicable laws and regulations.

Question 2

Why is Internal Control a process?

Answer 2

Internal Control is a process because:

1. It permeates an organisation’s operating activities and is an integral part of the management activities.
2. Internal control provides reasonable assurance.
3. Internal control systems have limitations, such as susceptibility to simple mistakes and errors, faulty judgements and decision making, management overrides, and conclusion.

Question 3

What functions internal control does?

Answer 3

Internal control does the following 3 important functions:

1. Preventive fucntions
   Deter problems before they arise. Examples, hiring qualified personnel, segregating employee duties, controlling physical access to assets and information, etc.
2. Detective functions
   Discover problems that are not prevented. Examples, duplicate checking of calculations and preparing bank reconciliation statements and monthly trial balances.
3. Corrective functions
   Identify and correct problems as well as correct and recover from the resulting errors. Examples, maintaining backup copies of files, correcting data entry of errors, and resubmitting transactions for subsequent processing.