ACC 342 Lecture Notes - Lecture 4: Public Company Accounting Oversight Board, Child Custody, Internal Control
More responsibilities on corporate executives and boards of directors to ensure that companies' internal
controls are reliable and effective. Created the Public Company Accounting Oversight Board (PCAOB)
which establishes auditing standards and regulates auditor activity.
Internal Control
Consists of the plan of organization and all the related methods and measures adopted within an
organization to:
1) safeguard its assests
2) enhance the reliability of its accounting records
3) increase efficiency of operations
4) ensure compliance with laws and regulations
Internal Control Systems have five primary components:
1) Control environment
2) Risk assessment
3) Control activities
4) Information and communications
5) Monitoring
Principles of Internal Control Activities
1) Establishment of Responsibility
2) Segregation of Duties
3) Documentation Procedures
4) Physical, Mechanical, and Electronic Controls
5) Independent Internal Verification
6) Human Resource Controls
1) Establishment of Responsibility
To specific employees- when only one person responsible for a specific task. (cashier or waiter)
2) Segregation of Duties
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Assignment of related activities to different individuals and establishing accountability, (keeping of
records) for an asset separate from the physical count of that asset
Two different types:
a) Segregation of related activities
b) Segregation of record- keeping from physical custody
3) Documentation Procedures
Provide evidence that transactions and events have occurred. Important safeguards: Pre-numbering
documents and accounting for all documents, forwarding source documents to accounting department
for timely recording of the transactions.
4) Physical, Mechanical, and Electronic Controls
Safeguard assets and enhance the accuracy and reliability of the accounting records (jewelry, electronic
stores, clothes with safeguard clip on)
5) Independent Internal Verification
Involves the review, comparison, and reconciliation of data prepared by other employees--verification
needs to be done periodically or on a surprise basis by an independent person who reports to
management any discrepancies and exceptions. Independent auditors are company employees who
evaluate on a continuous basis the effectiveness of the company's system of internal control
6) Human Resource Controls
a) bonding of employees who handle cash (insurance protection)
b) rotating employees' duties and requiring employees to take vacations and
c) conduct thorough background checks
Limitations of Internal Control
Designed to provide reasonable assurance that assets are properly safeguarded and that the accounting
records are reliable. The concept of reasonable assurance rests on the premise that the costs of
establishing control procedures should not exceed their expected benefit. Need to consider human
element and collusion since both can impair the effectiveness of the control.
Apply Internal Control Principles to Cash
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Document Summary
More responsibilities on corporate executives and boards of directors to ensure that companies" internal controls are reliable and effective. Created the public company accounting oversight board (pcaob) which establishes auditing standards and regulates auditor activity. Consists of the plan of organization and all the related methods and measures adopted within an organization to: safeguard its assests, enhance the reliability of its accounting records, increase efficiency of operations, ensure compliance with laws and regulations. Internal control systems have five primary components: control environment, risk assessment, control activities, information and communications, monitoring. Principles of internal control activities: establishment of responsibility, segregation of duties, documentation procedures, physical, mechanical, and electronic controls, independent internal verification, human resource controls, establishment of responsibility. To specific employees- when only one person responsible for a specific task. (cashier or waiter: segregation of duties. Assignment of related activities to different individuals and establishing accountability, (keeping of records) for an asset separate from the physical count of that asset.
