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Transcript of Internal Control
Because of time frames and readily available information, not all decisions made by management will produce the best results. This can render the system ineffective.
When trying to understand internal control, the first concept states that depending on the company's objectives, internal control works at different levels. Also, internal control does not provide that these objective will be reached but instead that they are attainable
Cost vs. Benefit Analysis
Management must weigh the potential benefits against the costs associated with implementing the procedures. Upon determining if a control should be implemented, the risk of failure and impact from it should be assessed. A valuable control system provides pertinent information without interfering with the normal course of business for a reasonable price.
All things break, internal controls are no different. The reasoning may be due to laziness or carelessness. They may also have a change of functions with the company. To try and prevent this from happening, a company may implement procedures which will limit the effect the breakdown has on other areas of the company
Internal control is a process that a company utilizes to provide reasonable assurance regarding the achievements of the firm's objectives.
Management override describes the unethical tampering of a control system to provide false financial information. Reasons for this can include inflation of earnings to meet budgets.
All things break, internal controls are no different. The reasoning may be due to laziness or carelessness. They may also have a change of functions within the company. To try and prevent this from happening, a company may implement procedures which will limit the effect the breakdown has on other areas of the company
Before moving on, let's test how much you already know about internal control.
True or False: Internal Control works only at the operational level of a company.
True or False: Internal Control cannot provide absolute assurance but only reasonable assurance
The second concept states that the process of internal control can only provide reasonable assurance in regards to the reliability of financial reporting, and compliance with applicable laws and regulations.
To review, the two concepts of internal control state that it works at different levels within a firm and that internal control can provide only reasonable assurance to financial reporting and regulation of laws. Although internal control can be very effective, there are still a few drawbacks. These weakness are commonly referred to by COSO as...
We will now explain the 5 main limitations of an internal control system.
Managers must make some tough business decisions, and they use their best judgement to do so. In hindsight, sometimes their best just isn't good enough. Say the manager of a manufacturing company decides to move all production and shipping deadlines up by two weeks. He believes his employees are capable of stepping up to the challenge and meeting these deadlines.
This new strategy could really improve the company's business. What actually happens though, is the manager failed to take into account the ability of the machinery to keep up, and production comes to a messy halt.
True Or False
At Toy's R 4 U Company, new employees shadow an experienced manager during non-busy hours before working the register during regular and busy hours. Bob, a new employee, has recently been hired and has been schedule to shadow John, the manager. Unexpectedly, John resigns for the company. This leaves Bob working the register by himself without previous training. This causes a break down in the system because the personnel will not understand the instructions, there will be a break in the schedule and cause employees to work overtime and affects the finances when having to compensate the employees
Tim, a store manager at a retail company overrides, and manipulates
the actual daily sales quantity in order to achieve the company's required sales goal for the month.
This is considered as an example for management override.
Collusion is individuals acting collectively to override a system or conceal unethical actions in their against the company. Collusion can exist in an employee-customer relationship or within different levels of management. Often it is used with the intention to alter financial data to meet reported results or targets.
John works at a high fashion retain store. He receives an employee discount and promotional deals when he work. Whenever his friend Steve visits him at work, John is generous enough to allow Steve to use his discounts. This is unethical and the company losses the profits from the sale.
Which of the following would NOT resolve the breakdown within the internal control system of Toy R 4 U?
a. Bob watches training video about using the cash register before working during store hours
b. Toys R 4 U Company has multiple managers who train new employees
c. Have Bob work the register anyway. He will figure out the system soon enough
It is an example for management override. Tim was able to overrules the daily operation count of sales for the month, this is problematic and
detrimental to the company.
Employee Meal Plans
Bailey works at a food service company that is run by the state. It is her job to verify that employees who were granted an earned meal met the designated requirements. The time, money, and opportunity cost of this process are the costs associated with this control. The compliance with food workers standards and the ability to receive a tax deductible expense are the benefits. As long as these benefits outweigh their costs, then a valuable control has been implemented.
The objectives of the firm are:
1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. Compliance with applicable laws and regulations.
Hello. During this presentation we will explain internal control. Please follow along and click forward at your own pace.
C is the Correct Answer
Although most registers are simple to an employee, they have been properly trained. Having Bob figure out the register on his own, without supervision, would not solve any problems and would cause a breakdown within the process of internal control.
(C. Have Bob work the register anyway. He will figure out the system soon enough)
When hearing the
word "collusion", most people think of the scandal within Enron and managers stealing money from a company secretly. Many do not think of situations similar to the friendship discount but it too is a form of collusion that happens on a daily basis in all companies.
In Summary: The process of internal control strives to create successful and efficient operations and enable reliable financial reporting that complies with standards. It can be used at all different levels of a firm to create reasonable, but not total, assurance. But however effective a system is, it is subject to limitations. These limitations include the potential for human error in judgment and opportunity for unethical behavior in both individual employees and groups. The desired system should be assessed overall in terms of the cost it brings and benefits received. Even so, the internal control process has the ability to break down due to organizational complications within a company. These limitations require internal control to be implemented carefully, but with its proper placement and use a company can greatly better itself.
True or False
If a manager chooses to buy out a company that is failing and the stocks drop because of it, the internal control system will be at fault and deemed useless.
The decision made was not a decision that would
have been foreseen by the internal control system
and within its ability to help. Internal control
systems can only provide reasonable assurance
and are not accountable for human