Chapter 4 Internal Control Cash Lapping takes lots of ingenuity Internal Control 1 Safeguard Assets A company must safeguard its assets otherwise its throwing away resources 2 Encourage Employees to follow company policy Everyone in an organization must work toward a common goal 3 Promote Operational efficiency You cannot afford tow waste resources Eliminate waste and increase your profits 4 Ensure Accurate Reliable Accounting Records Good records are essential You could be loosing money on every product you sell unless you keep good records for the cost of your products 5 Comply with legal requirements Sarbanes Oxley Act makes companies subject to the law Public companies must issue an internal control report and the outside auditor must SOX Provisions evaluate internal controls companies Public Company Accounting Oversight Board oversees the auditors of public An accounting firm may not both audit a public client and also provide certain consulting services for the same client Stiff penalities await violators 25 years in prison for securities fraud The components of Internal Control Control Environment Risk Assessment Control Procedures Monitoring of controls Information system Control Environment The tone at the top of the business the owner must demonstrate the importance of internal controls if he or she expects employees to take the controls seriously Risk Assessment A company must identify its risks Companies facing difficulties are tempted to falsify the financial statement to make themselves look better than they really are Are the procedures designed to ensure than that the business s goals are Control Procedures achieved Monitoring of Controls Companies hire auditors to monitor their controls Internal auditors monitor company controls to safeguard the company s assets and external auditors monitor the controls to ensure that the accounting records are accurate Information System The owner of a business needs accurate information to keep track of assets and measure profits and losses The person in charge of writing checks is called the treasure The chief accounting officer is called the controller Separation of Duties 1 Separate Operations from accounting Accounting should be completely separate from the operating departments such as production and sales 2 Separate the custody of assets from accounting The treasurer of a company should handle cash and the controller should account for the cash Neither person should have both jobs Audit is an examination of the company s financial statement and accounting system Audits can be either internal or external External auditors hired to determine that the company s financial statements agree with generally accepted accounting principals Internal auditors employees of the business that ensure that employees are following company policies and operation are running efficiently Documents provide the details of business transaction Fidelity Bonds the bond is an insurance policy that reimburses the company for any looses due to employee theft Mandatory Vacations and job rotation improves internal control E commerce pitfalls include Stolen credit card numbers Computer viruses and Trojan Horses Phishing expeditions Security Measures Encryption Firewalls Signature card Deposit Ticket Check Bank Statement Bank Reconciliation Encryption rearranges messages by a mathematical process Firewalls limit access into a local network The documents used to control a bank account include the Electronic funds transfer moves cash by electronic communication Bank Side of the Reconciliation 1 Deposits in Transit 2 Outstanding Checks 3 Bank Errors Book Side of the Reconciliation Bank Collections Electronic Funds Transfer Service Charge Interest Revenue on your checking account Nonsufficient funds checks The cost of printed checks Books errors Journalizing Transactions from the Banks Reconciliation The bank reconciliation is an accountant tools separate from the journals and ledgers The debit to cash should equal the amount deposited in the bank Controls over Payments by Check The check provides a record of the payment The check must be signed by an authorized official Before signing the check the official should study the evidence supporting the payment Petty Cash money that companies use to pay for necessities Cisco System the worldwide leader in network for the internet establishes a petty cash fund of 500 in a sales department Budget is an financial plan that helps coordinate business activities A cash budget helps a company or an individual manage cash by planning receipts and payment during a future period Cash equivalents include liquid assets such as time deposits and certificates of deposit
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