Chapter 7
1
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Define internal control
List and describe the components of
internal control and control procedures
Explain control procedures unique to ecommerce
Explain the Sarbanes-Oxley Act
Demonstrate the use of a bank account as
a control device
2
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Prepare a bank reconciliation and
journalize the related entries
Apply internal controls to cash receipts
Apply internal controls to cash payments
Explain and journalize petty cash
transactions
Identify ethical dilemmas in an internal
control situation
3
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Define internal control
4
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5
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Organizational plan and measures taken to:
Safeguard assets
Encourage employees to follow company
policies
Ensure accurate, reliable accounting
records
Promote operational efficiency
6
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2
List and describe the components of internal
control and control procedures
8
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Monitoring of controls
Information System
Control procedures
Control Environment
Risk Assessment
9
MICER
Acronym for the five
components
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Control
Environment
Risk
Assessment
Control
Activities/Procedures
Information and
Communication
Monitoring
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Control Environment
The “tone at the top” of the business
Starts with the C.E.O. and top executives
Behave honorably to set examples
Demonstrate importance of internal control
Practical insight:
“Do unto others as others have done to you”
Note: This is not the hallmark of healthy business
11
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Risk Assessment
Identify risks that your company faces
Operational, compliance, strategic, emerging
Examples: Customer harm, fraud, obsolete mission
Assess likelihood, severity, controllability
Focus on highest benefit value first
DANGER:
Be wary of zero probability
Criminal studies say…….
Do not let math override ethical values
12
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Policies and procedures designed to ensure that
goals are achieved
Hire, develop, and promote reliable, competent,
ethical people
Align actual and professed culture
Assign responsibilities to particular positions/people
Task ownership, traceable fault
Separation of duties
Conspiracy required
Audits
Independent analysis
Documented processes or technological equivalent
13
The paper trail
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Ensure adequate systems to execute your control
procedures
Accurate information leads to good decisions
Prevent unauthorized access to accounting systems
Insure adequate approvals for transactions
Measure and provide feedback on control
procedures
14
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Processes and procedures are first line
monitoring defenses
Frequent internal reporting/monitor
Internal Auditors
Employees of the company
Check for company policy adherence
Determine if requirements are followed
External Auditors
Completely independent of the business
Monitor controls on financial statement
presentations
Assess and provide opinions
15
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Other controls
Fireproof vaults
Alarms and security cameras
Junk-yard dogs
Loss-prevention specialists
Bonding employees
Mandatory vacations
Job rotation
16
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•
Wouldn’t you think you could
trust her?
•
•
Whose fault was this?
•
What internal controls could
help prevent this?
What signs were there that
fraud risk existed?
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3
Explain control procedures unique
to e-commerce
18
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Risks
Stolen credit card numbers and passwords
Computer viruses and Trojans
Phishing Expeditions
Security
Confidentiality
Integrity
Availability
Security measures
Encryption
Firewalls
19
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4
Explain the Sarbanes-Oxley Act
24
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SEC
Founded
1934
Internal
Controls
1977
Foreign
Corrupt
Practices
Act
25
Dodd
Frank Act
COSO,
1985
Financial
Stability
2002
2010
Sarbanes
Oxley
Corporate
Disclosure
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Congress passed SOX after the Enron and
WorldCom scandals
Provisions include:
Public companies must issue an internal control
report
Created Public Company Accounting Oversight
Board (PCAOB) to oversee auditors
Accounting firms may not both audit and provide
consulting services to the same company
Stiff penalties for violators (20–25 years in prison)
26
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User name: default
Password: mpcmpcmpc
Goto: www.mpcfaculty.net/jon_mikkelsen
Then follow the lightning bolt to SOX:
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Section 101:
Establishment of the Public Company Accounting Oversight Board. How
many accountants can be on the board? Why is this important?
Section 201 & 204 & others in the 200's:
Auditor independence and exclusion of duties that may be performed by
audit firms. What else are auditors prohibited from doing? Why does
this matter?
Section 302:
Corporate officer attestation. What do they have to attest to? How might
this affect their behavior?
Section 404:
Management assessment of internal controls. Who defines “adequate”?
Why aren’t there more details about that point?
Section 406:
Code of ethics for senior financial officers. If no such code exists, what
must the company do? Try to imagine an argument that works for you.
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5
Demonstrate the use of a bank account as a
control device
29
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Control Elements of a Bank Account
Cash
Most liquid asset
High probability of theft, expensive, preventable
Bank accounts enable practices for safeguarding
cash
Bank account controls
Signature card
Deposit tickets/receipt
Pre-numbered check sequence
Bank Statement
Controls still exists with e-banking
Bank reconciliation
30
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6
Prepare a bank reconciliation and the related
journal entries
31
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Explains the difference between cash reported
on bank statement and the cash balance in
the business’s accounting records.
Finding a 35 cent difference
isn’t the point. Preventing
$10,000 in cash theft is.
Guiding principle:
What hasn’t the other side
seen?
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Balance per Bank
Balance per Depositor
+ Deposits in Transit
+ Deposits by Bank
(credit memos)
- Outstanding Checks
- Service Charges
- NSF (bad) Checks
± Bank Errors
± Our Book Errors
= Adjusted Balance
= Adjusted Balance
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Complete a bank reconciliation for Rose Co.
Reconcile both the bank balance and Rose Co.'s
checkbook balance to the proper account
balance.
On Dec. 31 the checkbook balance of Rose Co.
was $755.09.
The bank statement balance was $602.05.
Checks outstanding were $249.54.
The statement revealed a deposit in transit of
$401.95 as well as a bank service charge of
$13.05.
The company earned interest income of $12.42.
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The
bank
statement
balance
Checks
outstanding
were
statement
revealed
a deposit
in transit
On Dec.
31company
the checkbook
of Rose
The
earned
interest
$249.54.
of
$401.95
as well as a bank service
was
$602.05.
Co. was
$755.09.
income
of $12.42.
charge of $13.05.
Balance per bank statement, December 31
Additions:
Deposit in transit
Deductions:
Outstanding checks
Adjusted cash balance
$
$
602.05
$
754.46
401.95
$ (249.54)
Balance per Rose's checkbook, December 31
$
755.09
Additions:
Interest income
$
12.42
Deductions:
Service Charges
$ (13.05)
Adjusted cash balance
$ Publishing
754.46
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as Prentice Hall.
Balance per bank statement, December 31
Additions:
Deposit in transit
Deductions:
Outstanding checks
Adjusted cash balance
$
$
602.05
$
754.46
$
755.09
$
754.46
401.95
$ (249.54)
Balance per Rose's checkbook, December 31
Additions:
Interest income
$
Deductions:
Service Charges
$
Adjusted cash balance
12.42
(13.05)
Only make journal entries to reflect
adjustments our company’s books – DO
Copyright journal
© 2012 Pearson Education,
Inc. Publishing as Prentice Hall.
NOT make the bank’s
entries!
Balance per Rose's checkbook, December 31
Additions:
Interest income
$
Deductions:
Service Charges
$
Adjusted cash balance
Date
Account Titles and Explanation
Dec 31 Cash
$
755.09
$
754.46
12.42
(13.05)
Debit
Credit
12.42
Interest income
12.42
Bank Rec: record interest received
Dec 31 Bank Service Charges
13.05
Cash
13.05
Bank Rec: Service charges deducted
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BANK BALANCE—ALWAYS
Add deposits in transit.
Subtract outstanding checks.
Add or subtract corrections of bank errors.
BOOK BALANCE—ALWAYS
Add bank collections, interest revenue, and EFT receipts.
Subtract service charges, NSF checks, and EFT payments.
Add or subtract corrections of book errors.
42
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7
Apply internal controls to cash receipts
51
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Receipt is issued for each transaction
Cash drawer opens when a transaction is entered
Cash Register records transaction
At the end of a shift, manager proves cash
Double entry accounting at its purest
At least once a day, deposit cash in bank
Register tape sent to accounting
department
52
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Mailroom employee opens mail
Checks are sent to treasurer and cashier deposits money
Remittance advice sent to accounting for journal entries
Controller compares records of
The day’s bank deposit amount from treasurer
The debit to Cash made by the accounting department
53
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8
Apply internal controls to cash payments
54
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4 step Purchasing Process:
STEP 1: Require a purchase order to order items
STEP 2: The items are sent and an invoice is sent to
the purchaser
STEP 3: Inventory is received and a receiving report
is created.
STEP 4: After approving all documents, a check is
sent for the amount invoiced.
A voucher system may be added for an extra layer
of separation of duties.
Purchasing should be separate
from receiving
56
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10
Describe ethical business issues related to
accounting
69
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Core
ethical
principles
70
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Fairness
Is the action fair to the parties involved?
Objectivity
Does the action optimize the total utility outcome
across all parties?
Honesty
Are the rights of involved parties respected?
Responsibility
Does your action show that you care about the
various stakeholders?
71
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Recognize and identify the ethical issue
Requires ethical and accounting principle
knowledge
Generate and specify alternatives
Two simplistic ones, less obvious ones too
Assess the possible outcomes on all
stakeholders:
Short term and long term
Fairness, Objectivity, Honesty, Responsibility
Make and support the decision
72
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Know your accounting
Purpose, Principles, Processes, Pitfalls
Situation familiarity
Learn where and when fraud happens
Learn how others have navigated the same issues
Ethical codes
AICPA
IMA
Internal
Learn how to sell your position
73
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You are the Controller in a medium sized
company that is just short of hitting profitability
goals as of the end of the quarter.
The Sales VP suggest that you falsely report
higher inventory levels to be able to meet profit
targets and achieve your generous all-or-nothing
bonuses.
The Issue
?
74
Alternatives
?
Stakeholder
outcomes
Decide &
support
Fair
Objective
Honest
Responsible
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Internal control systems are the rules and
boundaries that help protect what the company
owns, ensure that the company is operating
efficiently within those rules, and ensure that
the accounting reports accurately show
transactions that have occurred.
The Sarbanes-Oxley Act changed the rules for
auditors, limiting what services they can
perform in addition to the audit and requiring
the evaluation of internal controls. SOX also
created the PCAOB to watch over the work of
public company auditors.
75
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Internal control procedures include hiring
competent, reliable, and ethical personnel;
assigning responsibility for various tasks so
accountability may occur; separating key duties
so that one person doesn’t have access,
recording, and authorization functions;
performing internal and external audits; and
pre-numbering documents sequentially. The key
to each of these controls is that the cost of the
control should not exceed the benefit (savings)
from implementing the control.
76
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Internal control for e-commerce changes
constantly as technology continues to advance
and new threats to online security appear.
Protecting the company’s computer systems and
thus the company’s electronic assets from these
threats is a top priority when designing a
company’s internal control system.
Bank account controls help safeguard the most
liquid of company assets: cash. These controls
include signature cards, deposit tickets, checks,
bank statements, EFTs, and bank reconciliations.
77
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The bank statement, whether online or in paper
form, identifies transactions that need to be
recorded in the Cash account. The reconciliation
is a control over cash.
Internal controls are designed to insure that all
cash received gets to the company’s bank as
quickly and securely as possible.
Internal controls are designed to insure that all
cash payments are made in a timely manner for
paying the actual bills of the company.
78
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Because petty cash is so liquid, the main control
over petty cash is establishing one individual
who has control and responsibility for the petty
cash fund.
Internal controls should be designed to remove
the opportunity for individuals to act unethically.
79
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Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.
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