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Internal Controls

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palin edwards

on 4 November 2013

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Transcript of Internal Controls

Internal Controls
Accounts receivable & Accounts payable
non-current assests
What are they?
The policies & procedures that management uses to achieve the following:
Safeguard Assets
Ensure the reliability and integrity of financial information
Ensure compliance
Promote efficient and effective operations
Accomplishment of goals and objectives
Why do we need them?
When we buy, sell and manage assets using an accounting procedure, mistakes can happen, fraud can occur, efficiency can be compromised.
Internal Administrative
Types of Internal Control
Internal Accounting
Seven Internal Controls
Division of duties
Rotation of duties
Physical controls
Personal policies
Integrity controls
Sound accounting practices
Prevent theft & fraud
Prevent errors being made
Detect errors
Increase efficiency

Big 4
Who are they?
External Audit
Management & business consultancy
Risk assessment & control
34% of organisations have operations in high risk jurisdictions
Of these organisations:
21% have experienced a bribery and corruption incident in the last five years, and 61% of these occurred in the last 12 months
The survey was completed by 390 respondents,
including those from ASX 200 and NZX 50
companies, Australian subsidiaries of foreign
companies, public sector organisations and other
listed and private companies.

79% have not experienced a known instance of bribery and corruption in the last five years, but 48% of these have never conducted a corruption risk assessment
– 21% do not discuss corruption risk at
management or board level
The top three industries to have experienced
known bribery and corruption in offshore operations are:
– Energy and resources
– Manufacturing and engineering
– Financial services
Almost all of New Zealand’s export trade was with countries such as the UK, US and Australia
dropped to less than 50% and the majority moving to countries with high levels of corruption in both business and government.
example: Exports to china increased by 160%
Good governance
Identifying & reducing the risk eg. policies, frameworks, risk assessments
A good policy
Activity: Working in pairs read the article 'Red flags for business fraud'. Highlight any internal controls that you may recognise & examples
Division of duties
Rotation of duties
Physical controls
Personal policies
Integrity controls
Sound accounting practices
Text Book Chapter 7
page: 381
Internal Administrative Controls
Division of duties
The duties of personnel should be separated so that the work of one employee acts as a check on the work performed by another.By following this procedure, any inaccuracies should be located by at least one other person and subsequently corrected.
Theft or fraud is minimised as collusion would have to happen for this to occur.
Not always be feasible in small businesses with few
Rotation of duties
Rotation of duties has benefits for both the employees and the business. Employees benefit through multiskilling.The business benefits from the rotation
of duties because this provides one internal control to guard against any deviations from sound accounting practices.
Employees are discouraged from committing fraud if they know that another employee may soon be performing their work and consequently identifying possible discrepancies in the records.
In some organisations with a computerised system, the rotation of duties may be more difficult to achieve. Users of the system tend to specialise in a particular package or module, and may have little or no knowledge and experience of other sections of the computerised accounting process.
What is the purpose of a company providing credit?
All transactions in a business will ultimately result in receipt or payment of cash
Cash is liquid
Internal controls
The accounting systems
Are they an internal control?
Do they assist in managing cash?
Cash Controls
All cash received should generate a source document
Cash register receipts
Pre numbered sales dockets
Sales tickets
Credit/debit card vouchers
Receipts from A/R or other transactions-pre numbered receipt
Mail-entered into cash remittance book
All cash payments should be made by cheque
(except individual items paid through petty cash).
Cheque butt-evidence
Amounts verified against supporting documentation
Cheque's crossed with 'not negotiable'
Signed by minimum 2 authorised people within the business
All cash received should be banked intact daily.
No cash should be taken out of days receipts to pay other expenses
At the end of each day, the total amount of cash on-hand less the cash float should be banked.
All cash kept on the premises should be safeguarded
Only a small amount of cash, such as a float for a cash register, should be kept on the premises.
Locked in cash registers, safes, vaults or, as in the case of petty cash, in the petty cash container.
Bank Reconciliations
One of the primary internal accounting controls
Cash budgets
Petty Cash
Petty cash is a fund established by a business to provide cash to pay for small items of expenditure and to record these cash transactions for control purposes.
System of petty cash is an Internal control
The imprest amount is an advance from the bank account to the petty cash fund.
Petty cash advance is a Current asset
A credit transaction (sale or purchase) occurs when an agreement is made that goods/services can be received now and paid for at a later date.
Benefit for business: make trading conditions attractive to potential customers.
Increase Sales
Increase Profitability
Important note: Revenue from increased sales can also cover the additional cost of providing credit
Additional Expenses
Cost of providing discounts
Additional staffing costs, credit supervisor to assess a customer’s creditworthiness
Increased stationery, postage and printing costs
Telephone expenses-credit rating enquiries
Lost interest revenue opportunities
Bad debts resulting
Debt collection costs.
Costs Vs Benefits
Credit Policy
Written as part of the enterprises trading procedures

ascertaining the creditworthiness of customers
• determining maximum credit limits
• terms of payment, including any discount period
• whether interest will be charged on outstanding accounts
• collection procedures for overdue accounts.
Seven golden rules of credit management
pg 388 textbook
Review & practice a-f
W.A.L.T: To understand specific internal controls over Non-current Assets
W.I.L.F: Knowledge & skills to identify and apply internal controls
T.I.B: Greater understanding of the aims of internal controls and how these apply in business
Tax invoices and adjustment notes are required by the Australian Taxation Office (ATO) to provide GST records, but are also an important tool for keeping track of how much credit has been given to customers.
Source Documents
Illustrates the exclusion of the individual accounts for accounts
receivable and accounts payable from the general ledger, and the inclusion of only
two control accounts in the general ledger to replace the individual accounts.
Subsidiary ledgers (such as the accounts receivable ledger) used in conjunction
with a control account in the general ledger enable errors to be easily located and
Accounts receivable subsidiary ledger
Control Account
Subsidiary ledgers & Control accounts
Statements of accounts billing procedures
A statement of account is prepared from the subsidiary ledger and details the transactions involving each accounts receivable for the previous month.
Prepared monthly to avoid a heavy workload
Cycle billing
A-F First week of month
G-L second week of month
S-Z Final week
M-R Third week of month
Steady flow of cash
Provide regular work load
An important control device over accounts receivable is a list of accounts receivable, which details the length of time each debt has been outstanding.
Aged analysis of accounts receivable
Analysis-credit policy/credit manager
Estimate bad debts
Computer-generated aged analysis of accounts receivable
Division of duties
General ledger
Subsidiary ledgers
Subsidiary ledgers
Rotation of duties
Accounts receivable
Accounts payable
Interchanging the people responsible for each of the different ledgers.
Rotating duties will assist in reducing any opportunities for staff to commit fraud (limited amount of time in one role)
Improve efficiency
Develop expertise
Reciprocal Teaching
Credit policy
1. Access D&B small business
2. Complete activity sheet
3. Discuss answers
Chapter 7-Exercise 7.9
Accounts receivable control
Article 7.8 page 393 'The cheque's in the mail'
Source documents are essential control devices as they provide verifiable evidence of transactions.
Tax invoices
Adjustment notes
Statements of account
Example of control: renumber source documents to assist in the recording of credit transactions.
Authorisation & payment procedures
Discount period:
Goods purchased to the value of $1000
2.5% discount if paid within 7 days
Payments by cheque
Receipt of goods/services checked
invoice checked
Benefits of paying on time?
Computer generated schedule of accounts payable
This ensures that the person responsible for accounts payable is not responsible for purchasing items and paying accounts.
Subsidiary Ledger
General Ledger
I have the details
I have the balances
Control: Accounts payable
Control: Accounts receivable
Subsidiary: Accounts payable
Subsidiary: Accounts receivable
What are inventories?
Inventories are items held for sale in the normal course of the business’s operations
Sale of inventories = Profit
Control Account-General Ledger
Subsidiary Ledger (Stock cards)
Control over storage
Unsuitable storage conditions can lead to damaged broken or spoiled inventories. Resulting in a decrease in profits.
Storage for inventories is a cost for business
Security over inventories
Shoplifting from customers
Pilfering by staff
Computerised/Magnetised security tags
Surveillance cameras
bag checks
Security staff
Dye tags
Secure warehouse storage areas
Bars on windows
Store detectives
Burglar alarm systems
Checking customers
Procedures for staff purchases
Security Methods to protect stock
Control over purchasing/selling inventories
Just in time purchasing
Maintaining correct inventory levels
Control over ordering & dispatching
Control over loss through clerical errors
Monitoring turnover of inventories
Just in time purchasing
Great for a trading business, but what about manufacturing?
A minimum of inventories is held in stock and more frequent deliveries of goods is encouraged to ensure that inventories are held for a minimum period in storage before being sold.
Costs of carrying inventories
The costs of purchasing the inventories
The opportunity cost
Costs of storage & security, including personnel
Costs associated with damaged or spoiled of stored goods
The cost of storage space (building)
Example: A trading firm can avoid carrying large items eg. furniture by only taking orders from customers
Maintaining correct inventory levels
Control over ordering & dispatching
Control over loss through clerical errors
Monitoring turnover of Inventories
To maintain correct inventory levels a method of determining the best quantity of inventory to order is the:

Economic Order Quantity (EOQ) method
Order size
(Minimising the total order, shipping & storage costs, but maintaining adequate levels of inventory)
The reorder point is a predetermined number of inventories at which ordering occurs.
Controls need to be instituted to ensure that the inventories that have been ordered are in fact received. This also applies to the dispatch of goods.
Incorrectly pricing stock, giving incorrect change, or inadvertently charging a customer for less stock than the customer receives
Errors, no matter how small, can accumulate to represent a significant cost to a business.
Inventories should be sold (turned over) as quickly as possible. The quicker the rate of turnover, the greater the opportunity to make profits.
Stock turnover rate
Measures how many times during the period the average number of inventories has been sold.

Cost of Goods Sold/Average Inventory

Average Inventory:
(Opening + Closing Inventory)/2

A Company has Opening stock of $24,000 and closing stock of $36,000. The cost of goods sold is $210,000 what is the stock turnover rate? How often is the average inventory sold in days?
Stock take
Research Activity
Go to www.qld.gov.au
Go to tab Business & Industry
Search 'stock control: the basics'
Access activity sheet & answer questions
Inventory Management Controls
Comprehension Activity
What are non-current assets?
Earn revenue not for resale
Property, plant & equipment
Kept longer than 1 accounting period
Usually come at a large expense
Require adequate controls
Purchasing of Assets
Large outlays
Calculate in terms of:
-Value for money
-Lifetime running costs
Making the right purchasing decision
Determining the real costs of purchasing assets involves calculating:
1. Whole-of-life costs: Acquisition costs, operating costs, maintenance costs, alteration, disposal & support costs.
2. Transaction costs: Planning the purchase, selecting suppliers & ordering/paying
3. Non-cost factors: fitness for purpose, technical/financial, benefits, availability maintenance/support
Administrative Controls
Help reduce theft & loss of non-current assets
Property, plant & equipment register
The details are recorded in the property, plant & equipment register
The control system would involve procedures involving:
Pg 403 Textbook
Complete R & P Q.A-D
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