BSB110 Lecture Notes - Lecture 7: Internal Audit, Internal Control, Administrative Controls
Week 7 Accounting Lecture Notes
Accounting Information Systems
Principles of Accounting Information Systems
1. Cost effectiveness:
o Cost versus benefits consideration
2. Useful output:
o Relevant, Reliable, understandable, timely, comparable
3. Flexibility:
o Technological advances, increase competition, changing accounting
principles, organisational growth, government regulation and de-
regulation
Phases in Developing an Accounting System
Developing an Accounting System
• Accounting system must have adequate controls to ensure that:
o The assets of the business are safeguarded
o Information provided by the system:
▪ Is faithfully represented
▪ Relevant
▪ Timely
Internal Control Systems
• Internal control is an essential part of risk management.
• It consists of all the processes used by management and staff to:
o Provide efficient and effective operations and;
o Comply with laws, regulations and internal policies.
• Two aspects of internal control:
o 1. Administrative controls provide operational efficiency and adherence to
policy and procedures.
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o 2. Accounting controls are the methods and procedures used to protect
assets and ensure that transactions are recorded appropriately
Management Responsibilities for Internal Control
• Large companies establish objectives which encompass the principles of the
organisation.
• Management is responsible for developing practices and policies which are
consistent with these objectives.
• Corporate governance represents the framework of rules, relationships, systems
and processes within which authority is exercised within the organisation:
o Internal audit is an element of good corporate governance that involves
monitoring the effectiveness of internal controls.
Principles of Internal Control
1. Establishment of responsibility.
2. Segregation of duties:
• Related activities.
• Accountability for assets.
3. Documentation procedures.
4. Physical, mechanical and electronic controls.
5. Independent internal verification.
Principles of internal control
Establishment of responsibility
• Assigning specific duties to specific personnel (or positions)
• Assigning appropriate duties for the skill level of the staff members
Segregation of duties
• Separation of operations from accounting
• Separation of the custody of assets from accounting
• Separation of the authorisation of transactions from the custody of related assets
• Separation of duties within the accounting function
Documentation procedures:
• Documents should be pre-numbered and standardised (e.g. sales invoices)
Physical, mechanical and electronic controls:
• Fireproof vaults, alarms, video surveillance
Independent internal verification:
• Internal audit function and board audit committees
Limitations of internal control:
• cost versus benefits
• human imperfection
• business size.
Forensic Accounting:
• The application of accounting knowledge and analysis in the context of civil and
criminal litigations and investigations.
• Proactive risk reduction strategies
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Accounting Information Systems
• Accounting information systems involve three phases:
o 1. Input
o 2. Processing
o 3. Output
• Raw transactions are transformed into financial statements to provide information
for decision making.
Sales and Receivables Cycle Illustrated
Purchases and Payments Cycles Illustrated
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Document Summary
Principles of accounting information systems: cost effectiveness, cost versus benefits consideration, useful output, relevant, reliable, understandable, timely, comparable, flexibility, technological advances, increase competition, changing accounting principles, organisational growth, government regulation and de- regulation. Developing an accounting system: accounting system must have adequate controls to ensure that, the assets of the business are safeguarded. Internal control is an essential part of risk management. It consists of all the processes used by management and staff to: provide efficient and effective operations and, comply with laws, regulations and internal policies, two aspects of internal control, 1. Administrative controls provide operational efficiency and adherence to policy and procedures: 2. Accounting controls are the methods and procedures used to protect assets and ensure that transactions are recorded appropriately. Internal audit is an element of good corporate governance that involves monitoring the effectiveness of internal controls.
