CHAPTER
7
INTERNAL CONTROL
AND CASH
INTERNAL CONTROL ACTIVITIES
Authorization
Segregation of duties
Documentation
procedures
Safeguarding assets and
records
Independent verification
Other Controls
INTERNAL CONTROL ACTIVITY
Segregation of duties:
 This is the most important control activity.
 Duties should be divided up so that one
person can not commit a fraud and cover it
up.
 The work of one employee should provide a
reliable basis for evaluating the work of
another employee.
INTERNAL CONTROL ACTIVITY
Segregation of duties:
1. The responsibility for related activities (such
as ordering and paying / ordering and
receiving) should be assigned to different
individuals.
2. The responsibility for accounting for an asset
should be separate from the responsibility for
physical custody of that asset.
3. Let’s get into groups of 3 people and make skit
or cartoon or , song, which describes this
Bestbuy example or any other creative story.
PRINCIPLES OF INTERNAL CONTROL

Documentation procedures: Documents
should provide evidence that transactions and
events have occured.
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For example, if a customer paid cash, but the
worker did not record this transaction, then there
is not any evidence or proof. This means that the
worker can steal the company’s money.
Another example, the workers who work in
storage room, must keep the documents such as
purchase invoice or shipping documents.
PRINCIPLES OF INTERNAL CONTROL

Documentation procedures:
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If there is no document (or source document),
then an employee can easily steal an asset from
his or her company.
Procedures should be estabilished for documents.
First, whenever possible, documents should be
pre-numbered and all documents should be
accounted for. Prenumbering helps to prevent a
transaction from being recorded more than once
or not at all.
PRINCIPLES OF INTERNAL CONTROL

Documentation procedures:
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Second, documents should be prepared when the
transactions happen. (Otherwise employees
might forget to make the transactions.)
Third, source documents for accounting entries
should be sent to the accounting department
immediately so that a bookkeeper can record an
accounting transaction asap.
These control activities increase the accuracy
and reliability of the accounting records.
PRINCIPLES OF INTERNAL CONTROL
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Physical Controls : Physical controls
include mechanical, and electronic controls to
safeguard (protect) assets and improve the
Tand reliability of the accounting records.
Examples are safes, vaults, safety deposits,
locked warehouse, storage cabinets,
passworded computers, alarms, TV
monitors, Time clock which keeps track of
employee’s work hours and attendance
PRINCIPLES OF INTERNAL CONTROL
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1.
2.
3.
Performance Review (or Auditing) : Most
internal control systems include internal reviews and
external reviews of records.
This means having someone else review or confirms
the accounting data.
The review should be done periodically or on a
surprise basis.
The review should be done by someone who is
independent of the employee who is responsible
for the information.
Discrepancies and exceptions should be reported to
a management level, who can correct situation.
Performance Review
Internal Review
 An independent reviewer would compare
accounting records with existing assets or
with the source documents.
 For example, they would review that cash
register sales records with cash in the
register. They would also review that
expensive assets are physically at the store or
storage room as it is recorded in ledger
account.
Performance Review
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.
ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Segregation
of Duties
Accounting Employee A
Maintains cash balances
per books
Assistant Cashier B
Maintains custody of
cash on hand
Independent Internal Verification
Assistant Comptroller C
Makes monthly comparisons: reports any irreconcilable differences to comptroller
Classwork / Homework
P377 BE7.1 and BE7.2
P378 Ex 7-1
P383 P7-1