internal control atg 383, chapter 8 spring 2002. introduction zdefine internal control zwho is...
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Internal Control
ATG 383, Chapter 8
Spring 2002
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Introduction
Define internal controlWho is responsible for
control.Why is control important?
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Internal Control is …..
The steps a company takes to prevent employee fraud.
True False
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Internal Control is …..
What you do to provide reasonable assurance you will achieve your objectives.
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Who is responsible for internal control?
Everyone has a part!
Board of directorsManagementEmployees
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Why is internal control important?
Management has a fiduciary responsibility to establish controls.
Go to jail. Foreign Corrupt
Practices ActGet shut down.
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Ways to categorize controls
Prevent
Detect
Correct
Problem:Web site is hacked
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Ways to categorize controls
Prevent
Detect
Correct
Problem:Employees not qualified
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Ways to categorize controls
General
Application
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Components of Internal Control
Control EnvironmentRisk Assessment
Control Activities
Monitoring
Info
rmat
ion
&
Com
mun
icat
ion
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Control Environment
The following slides provide examples, both good & bad, of the control environment’s components.
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Components of Control Environment
Penn Square’s assets doubled every two years. The chief loan officer was known
for wearing his Mickey Mouse hat and drinking beer from cowboy boots.
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Components of Control Environment
During orientation, company policies are explained. Each employee
is given a policy manual
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Components of Control Environment
This group is composed of business professionals who are not employees
of the company. E.F. Hutton, usedthe owner’s granddaughter,
an actress.
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Components of Control Environment
At E.F. Hutton, branch managersreceived 10% of the interestprofits as a year-end bonus.
Managers were encouraged to becreative so as to increase profitability.
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Components of Control Environment
At Sumitomo Corp, the chief coppertrader could execute off-the-bookstrades without special approval,
resulting in $1.8 billion loss.
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Components of Control Environment
In order to maintain depositinsurance, banks must comply
with the Federal Deposit Insurance Corporation’s standards.
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Components of Control Environment
At Lincoln Savings, the president’ssalary was $1 million.Age = mid-twenties.
Prior experience = owner’s son & busboy.
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Components of Internal Control
Control EnvironmentRisk Assessment
Control Activities
Monitoring
Info
rmat
ion
&
Com
mun
icat
ion
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Risk Assessment (2nd component)
Why have risk assessment?
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Risk Assessment
How do you manage potential problems?
Fig 8.3 (p. 270) & Table 8.4 (p. 273) illustrate this process.
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Risk Assessment Example
Assume 260 processing runs per year.
Cost to reprocess data: $5,000Frequency of reprocessing: 1%Cost of control: $30,000
3 year expected lifeNew frequency of
reprocessing: .001%
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Components of Internal Control
Control EnvironmentRisk Assessment
Control Activities
Monitoring
Info
rmat
ion
&
Com
mun
icat
ion
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Control Activities (3rd component)
Policies and rules that provide reasonable assurance that management’s control objectives are achieved.
5 categories - p. 261
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Proper Authorization
Specific authorizationGeneral
authorization
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Segregation of Duties
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Segregation of Duties
Authorize Record Custody
Record Authorize falsepayment. Do notrecord check.Fudge bankreconciliation.
Custody
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Segregation of Duties
Authorize Record Custody
Record Writeunauthorizedcheck. Do notrecord. Fudgereconciliation.
Custody
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Segregation of Duties
Authorize Record Custody
Record
Custody Steal cash.Authorize falsetransaction that isonly recorded.Never paid.
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Remaining control activities
Adequate documents and records
Safeguards over assets and records
Independent checks on performance
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Batch Totals
Employee No Name Hours
123 Able 40
125 Baker 40
126 Cain 35
130 Dodge 30
132 Edwards 32
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Components of Internal Control
Control EnvironmentRisk Assessment
Control Activities
Monitoring
Info
rmat
ion
&
Com
mun
icat
ion
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Monitoring (4th component)
Ongoing evaluations - during the normal course of operations.
Separate evaluations - a “fresh pair of eyes” such as internal auditing.
Information from external parties.
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Monitoring
OngoingEvaluation
SeparateEvaluation
Effectivesupervision
ResponsibilityAccounting
InternalAuditing
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Review to now
Establish good control environmentAssess riskInstall control activitiesMonitor internal control to be sure
that Risks are addressed. Controls are properly designed and
operating effectively.
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Components of Internal Control
Control EnvironmentRisk Assessment
Control Activities
Monitoring
Info
rmat
ion
&
Comm
unic
atio
n
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Information and Communication
Characteristics of an effective accounting information system?
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Information & Communication (5th comp.)
Good internal control requires that information be identified, captured, and communicated in a form and timeframe that enables people to carry out their jobs.
Today’s Headlines
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Information example
Convenient Foods Stores - accounting system could not handle rapid growth
Number of stores increased from 1,050 to 1,400 in two years.
Original report of income: $2.5 M July - revised to $80 K October - revised to ($2.0) M
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Summary - Internal Control has 5 components
Control Environment
Risk AssessmentControl
ProceduresMonitoringInformation and
Communication