Term 2- Internal Controls

Question 1

Definition of Internal Controls

Answer 1

Internal Controls safeguard the assets of a business through the implementation of administrative and accounting procedures.

Question 2

The Aims of Internal Controls

Answer 2

The aims of internal controls are to: prevent theft and fraud; prevent errors from being made in the first place; detect any errors if they are made and increase efficiency

Question 3

Introduction

Answer 3

There are Accounting and Administrative controls which should exist in a business. The controls covered in this report are SOUND ACCOUNTING PRACTICES, DIVISION OF DUTIES and PHYSICAL CONTROLS. In this report the internal controls over cash AND credit that are currently present and those that require attention to improve the current situation of the business will be addressed.

Question 4

Sound Accounting Practices

Answer 4

Sound Accounting practices are evident in a system where the practices of checks and balances are used to offer control and security over all accounts. Routine and random independent checks should be made to verify the accuracy of the accounting records and the physical location, condition and number of assets held. The use of prenumbered source documents, a chart of accounts and comparative analysis are examples of sound accounting policies and practices that aid internal controls in a business.

Question 5

Division of Duties

Answer 5

Division of Duties is when the duties of personnel are separated so that the work of one employee acts as a check on the work performed by another. It Reduces the possibility of theft as collusion would have to happen for this to occur.

Question 6

Physical Controls

Answer 6

Physical Controls safeguard the financial records and assets of the business; through the use of safes and secured storage areas within locked buildings, keeping keys secure and employing surveillance equipment and/or security staff. Access to these areas should be restricted to authorised personnel.

Question 7

All Cash Received should generate a source document

Answer 7

SOUND ACCOUNTING PRACTICE

• Provides Verifiable evidence
• Ensures that the actual cash recieved is equal to the document amount

Question 8

All Cash Received should be banked intact daily

Answer 8

PHYSICAL CONTROL

• large amount of money on the premise posing a greater risk of theft
• not safeguarding the assets of the bussiness

SOUND ACCOUNTING PRACTICE
- the amount in the bank will not equal the amount recieved

Question 9

All Cash kept on premise should be safeguarded- Cash for floasts and petty cash should be Kept under lock and Key

Answer 9

PHYSICAL CONTROL

• preventing theft
• Should be restricted to authorised personnel.

Question 10

All Payments made by cheque

Answer 10

• Provides verifiable evidence of payment; cheque butt

Question 11

Cheques should be signed by a minimum of 2 authorised personnel

Answer 11

• Prevents unauthorised purchases with business funds
• If cheques are used to commit fraud it must then be in collusion
• not doing so is not meeting physical controls and safeguarding assets

Question 12

Cheques should be crossed “Not Negotiable”

Answer 12

Ensures the money goes into a certain bank account

Question 13

Cancelled Receipts and cheques should be kept

Answer 13

Marked and Cancelled for auditing purposes

Question 14

Division of Duties

• Receipts and Payments not to be handled by the same person
• The person banking money should not be responsible for any accounting

Answer 14

• one employees work acts as a check on the work preformed by another
• separates the handling and recording of cash
• Minimises the possibility of theft or fraud as collusion would have to occur

Question 15

Rotation of Duties

Answer 15

• Employees are discouraged from committing fraud as they know another employee will soon be performing their work and hence identifying any possible discrepancies in the records.
• Enables Multi Skilling of employees
• Guards against any deviation from sound accounting practices
• Allows for the discovery of unusual entries and errors

Question 16

Bank Reconciliations

-Should be completed by a separate person

Answer 16

• allows for errors to be detected; stopping fraudulent behaviour
• allows for Auditing; reconciling cash balances with cash records
• ensuring agreement between the the business and the bank records
• Without Bank Reconciliations the business is neglecting the sound accounting practice of completing routine and independent checks that can verify the accuracy of the accounting records

Question 17

Petty Cash

- Authorised access

Answer 17

• Prevents money from being taken out of receipts acting as a sound accounting practice
• Provides evidence of purchases made by the business
• Authorised Access- Prevents misuse of business funds
• Should be safeguarded through the use of a safe with restricted access to authorised personnel.

Question 18

Personnel Policies- Employing Authorised Personnel

Answer 18

• the employment of qualified and reliable personnel are required to implement the accounting process
• are able to preform their responsibilities conscientiously and are accountable for their role in the operations of the business

Question 19

Integrity controls

Answer 19

• Ensure tat the accounting process is developed and maintained
• Confidentiality of records is protected by storage in secure areas and restricting access of information to relevant personnel only

Question 20

All money should be placed in a safe

Answer 20

• Implementation of Physical controls

- safeguards the assets of the business from theft as access is restricted to authorised personnel.

Question 21

Credit Applications should be verified

Answer 21

Verification of credit application will ensure that the customer can pay the business back.

Preventing the business from gaining a large amount of bad debt, which is not a sound accounting practice as it is not safeguarding the assets of the business

Question 22

Follow up on overdue loans

Answer 22

if no follow up is made the customer may take advantage, meaning the business isn’t going to be paid for an extended period of time
This can be used to prevent bad debt.

The charging of interest should be enforced on overdue bills

Question 23

The Lack of a credit policy will

Answer 23

is not a sound accounting practice as it does not safeguard the assets of the business.

Question 24

A credit policy:

Answer 24

• assists in the controlling of credit
• ensure that their are well planed credit procedures in place
• ensures the creditworthiness of potential customers
• necessary for the customer and business to have a relationship on credit