internal control and cash friday, we will meet in room 217 chapter 7

INTERNAL CONTROL INTERNAL CONTROL AND CASHAND CASH

Friday, we will meet in room 217

CHAPTERCHAPTER

77

Internal Review:• In large companies, controal activities

(including internal review) are monitored by internal auditors.

• Internal Auditors are company employees who evaluate the internal control system of the company. (whether the system is effective)

• They periodically review the activities of departments and individuals to determine whether the correct control activities are being followed.

Performance ReviewPerformance ReviewPerformance ReviewPerformance Review

Internal Review:• Internal Review have become so important

that CEO and CFO must certify that they have evaluated the effectiveness of the company’s internal control over financial reporting.

• Their conclusions must be included in the company’s management discussion and analysis section of the annual report. (disclosure note)


External Review :• Internal auditors work for the same

company they review, but external auditors do not work for the company they review but typically work for CA firms.

• External auditors focus on making sure that financial statements fairly present the company’s financial position. (also whether the company is complying with IFRS rules.)


External Review :• All public companies (their shares are traded in

stock exchange) are required to have an external audit.

• Auditors check, verify and audit (tracing and vouching) the books of the client.

• This is why accounting firms make millions of dollars.

•


1. Bonding of employees who handle cash: Bonding means getting insurance called

fidelity insurance. If one of the employee steals money (or asset) then the insurance compay will compensate the employer for losses due to dishonesty of an employee.

When employees know that the company has fidelity insurance, they will think twice before stealing company’s asset because the insurance company will prosecute all criminals.

Other ControlsOther ControlsOther ControlsOther Controls

2. Rotating employees’ duties and requiring employees to take vacations.

These measures discourage employees from attempting any thefts since they will not be able to permanently hide their improper actions.

Many bank embezzlements, for example, have been discovered when the guilty employee was on vacation.

Other ControlsOther ControlsOther ControlsOther Controls

LIMITATIONS OF INTERNAL CONTROLLIMITATIONS OF INTERNAL CONTROL

Cost / Benefit No matter how well it is designed and operated, a company’s system

of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable.

The concept of reasonable assurance is based on the belief that the cost of control activities should not be more than their expected benefit.

Cost < Benefit then they will implement the internal control system.

For example, security guard at Wal-Mart

Cost is 40000 a year > benefit of 10000 then we

Will not hire him or her.

LIMITATIONS OF INTERNAL CONTROLLIMITATIONS OF INTERNAL CONTROL

Collusion Two or more employees may work together to

get around controls. Such collusion eliminates the protection

which is offered by segregation of duties.

LIMITATIONS OF INTERNAL LIMITATIONS OF INTERNAL CONTROLCONTROL

Size of business Size of the business may also limit internal

control. For example, in small companies, it is

difficult to segregate duties or have independent performance reviews.

This is why in small business, the owner does internal review and many other functions.

LIMITATIONS OF INTERNAL LIMITATIONS OF INTERNAL CONTROLCONTROL

Human element Human factor is an important limit in internal control

system. A good system can become ineffective as a result of

employee fatigue, carelessness, indifference and lack of training.

Classwork / HomeworkClasswork / Homework

P378 Ex 7.1 P379 Ex 7.2 P383 P7.1

internal control and cash friday, we will meet in room 217 chapter 7

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