Chapter 5 Flashcards
- processes and procedures implemented by an organization to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud or errors.
Internal Control
provide reasonable assurance that the organization can meet its objectives.
Control System
strong internal controls require considerable effort
- identify & assess risks
- prioritize which controls to test to assess their effectiveness
- identify exceptions (test failures)
- draw conclusions based on the investigation
- identify controls that mitigate risks & assess their impact
- conduct tests
- investigate exceptions
- develop & implement a plan to address specific exception & prevent future occurrences
Objectives of Internal Control
- Efficient conduct of business
- Safeguarding assets
- Preventing and detecting fraud and other unlawful acts
- Completeness and accuracy of financial records
- Timely preparation of financial statements
Smaller, unincorporated businesses
- sole traders and unlimited partnerships, the responsibility for internal controls often lies with
owners
Limited company
is responsible for ensuring that appropriate internal controls are in place
- board of directors
are those which must be applied, irrespective of circumstances
o Mandatory controls
are applied according to the judgement of the organization and its managers
o Voluntary controls
according to their interpretation or judgement of risks in given circumstances
discretion
controls must be applied
o Non-discretionary
are applied by the individual employee
o Manual controls
are programmed into the systems of the organization
o Automated controls
help to ensure the reliability of data generated by systems, helping to ascertain whether systems operate as intended and output is reliable.
o General controls
are automated and designed to ensure the complete and accurate recording of data from input to output
o Application controls
- restrictions on access to buildings, specified office or factory areas or equipment, such as turnstiles at the entrance to the premises, swipe cards and passwords
Physical controls
- these will usually be specified in the terms of employment
Authorization and approval limits
- duties associated with cash handling are often segregated
Segregation of duties
- operated by managers themselves
Management controls
- ensure accurate recording and processing of transactions.
Arithmetic and accounting controls
- qualifications verification, references and criminal record checks on recruits, checks on staff who must be attested for competence and training effectiveness.
Human resources controls
