Chapter 7: Accounting Systems

Question 1

Internal Control system

Answer 1

• Efficient use and protection of an entity’s assets is a primary management function
• All procedures adopted by an entity to control its activities and protect its assets are described collectively as an internal control system

Question 2

Principles of internal control

Answer 2

• Organizational culture
• Clearly established lines of responsibility
• Separation of record keeping and custodianship
• Division of responsibility for related transactions
• Mechanical and electronic devices
• Adequate insurance
• Internal auditing
• Programming controls
• Physical controls
• Other controls

Question 3

Ethical management and good corporate governance

Answer 3

1. Each employee is responsible for their specific area
2. Those maintaining A/c’s are separate to those who have custody of assets
3. Delegation of duties to multiple employees
4. Use of cash registers and bar codes
5. Insuring all assets at market value or replacement cost
6. Use of internal auditors (periodically)
7. Computer system filters and safeguards (hackers and passwords)
8. Use of id cars, security fencing and safes
9. Pre numbering of all documents in sequential order and rotation of employees

Question 4

Limitations of internal control systems

Answer 4

• Absolute assurance not possible
• Effectiveness influenced by size of entity’s operations
• Good controls can break down due to tiredness, indifference or carelessness
• Heavy reliance on segregation of duties
• Difficulties in detecting computer fraud

Question 5

Sales Journal

Answer 5

• Records only credit sales of inventory
• Total posted to general ledger monthly
• Detail by debtor posted to subsidiary ledger daily
• Advantages
– Each transaction recorded on a single line
– Entries do not require a narration
– Posting efficiency achieved

Question 6

Purchases Journal

Answer 6

• Records only credit purchases
• Can be used for items other than inventory
• Total posted to general ledger monthly
• Detail by debtor posted to subsidiary ledger daily
• Advantages
– as for sales journal

Question 7

Cash receipts journal

Answer 7

• Records all receipts of cash
• Records each receipt and total banked
• Totals posted to general ledger monthly
• Detail (debtors only) posted to subsidiary ledger daily
• Columns set up for common receipts

Question 8

Cash payments journal

Answer 8

• Records all payments of cash
• Records each payment and cheque number
• Totals posted to general ledger monthly
• Detail (creditors only) posted to subsidiary ledger daily
• Columns set up for common payments