Components of Internal Control
What is the acronym used to describe the components of internal control?
CRIME
What are the 2 records of a business's cash?
The cash account on the company ledger
The bank statement
What are 2 internal controls for receipt of cash over the counter?
–The cash register should be positioned so that customers can see the amount the cashier enters into the terminal
–A receipt is issued for each sale recorded
–The cash drawer should open only when the clerk enters a transaction
–Cash needs to be deposited in the bank, and the machine tape goes to accounting to record daily sales
What is Petty Cash and why is it a concern from an internal control perspective?
Cash kept on hand to pay small amounts - more easily subject to theft
What are the 3 components of the fraud triangle?
Opportunity
Pressure/Motive
Rationalization
With what component of control do companies hire both internal and external auditors?
Monitoring of Controls
What is the primary reason for differences between the cash ledger and the bank statement?
Timing Differences
What are 2 internal controls for cash received by mail?
–All incoming mail is opened by a mailroom employee
–The treasurer has the cashier deposit the money in the bank
–Remittance advices and records of payment go to the accounting department (to record journal entries)
–The controller compares the records of the day’s cash receipts to ensure that they match
–Some companies use a lock-box system and receipts are sent directly to a box belonging to the bank, which directly deposits it to the customer’s bank account; company personnel never touch incoming cash
When are journal entries made for petty cash payments?
Not until the fund is replenished
What are 2 common e-commerce pitfalls?
–Computer viruses and Trojans
–Phishing expeditions
–Identity theft
–Stolen credit-card numbers
This internal control component ensures that only authorized users have the access and adequate approvals needed to keep track of assets and measure profits and losses
What are 2 documents used to control a bank account?
–Signature card
–Deposit slip
–Cheque
–Bank statement and paperless banking
–Bank reconciliation
Why is payment by cheque an effective internal control?
–The cheque provides a record of payment
–The cheque must be signed by an authorized official or preferably two signatures
–The signing official studies the evidence supporting the payment
What is the journal entry to start a petty cash fund?
Debit Petty Cash/Credit Cash
What is an example of a security measure for E-Commerce?
Encryption
Firewalls
What are 3 characteristics of an effective system of internal controls?
- Competent, reliable, and ethical personnel
–Assignment of responsibilities
–Proper authorization
–Separation of Duties (see next slide)
–Internal and external audits
–Use of documents and records
Use of electronic devices and computer control
Does the book or bank side need to be adjusted for interest revenue earned on chequing account?
Interest Revenue will be on the bank statement and will need to be adjusted in the general ledger cash account.
What type of account is the Cash Short/Over Account and on what financial statement would it appear on? (Accounting Equation)
An expense account
The income statement
What are 2 internal control procedures for petty cash?
–Designating a custodian of the petty cash fund
–Keeping a specific amount of cash on hand in a secure location
–Supporting all fund payments for expenses with a petty cash ticket or voucher
–Do surprise audits of the fund to ensure receipts and cash total the assigned amount
What are the 2 limitations of internal control?
Collusion
Cost-Benefit
What component of control relates to Management modelling good behavior and taking responsibility for financial statements
Environmental Controls
What adjustment to the bank reconciliation needs to be made for an NSF cheque from a customer?
You will need to reverse the receipt of payment from the customer. Will reduce cash and increase accounts receivable accounts. Debit AR/Credit cash
What is the 3 documents used in the 3 way match process when making purchases?
Purchase Order - purchaser
Invoice - from supplier
Receiving Report - purchaser checks goods to ensure all received based on PO and invoice
What type of system is commonly used to maintain control of a petty cash account and what does it mean?
Imprest System
Constant Balance is maintained in the Petty Cash account
Cash + disbursement tickets must total the same amount as designated in the opening Petty Cash account
What are the 3 components within the separation of duties (CAR)?
C - Separate the custody of assets from accounting – ie. - an employee should not handle cash and accounting duties
A - Separation of the authorization of transactions from the custody of related assets – ie. – same person should not authorize payment of invoices and write the cheque
R - Separate operations from record keeping – accounting should be separate from operating departments, like production and sales (inflate sales)