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Chapter 7

ACCT 1220 Chapter Notes - Chapter 7: Internal Control, Risk Assessment, Financial Statement


Department
Accounting
Course Code
ACCT 1220
Professor
Philippe Lassou
Chapter
7

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Internal Control
•The systems adopted within a company to help it achieve:
Reliable financial reporting
Effective and efficient operations
Compliance with relevant laws and regulations
•Also help prevent and detect errors, which cause unintentional misstatements
•An effective way to prevent and detect fraud
•Good internal control systems have five primary components:
Control environment
Risk assessment
Control activities
Information and communication
Monitoring activities
Control Activities
•Control activities include:
Assignment of responsibility
Segregation of duties
Documentation
Physical controls
Review and reconciliation
•Specific control activities used by a company will depend on:
The risks it is facing, and management’s assessment
The size and nature of the company
Fraud
•An intentional act to misappropriate (steal) assets or to misstate financial statements
•Examples of misstatements:
Recording expenses as assets
Overstating useful lives of asset

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Limitations of Internal Control
•Can only provide reasonable assurance that assets are safeguarded and records are reliable
•Limitations include:
Cost / benefit considerations
Human error
Collusion
Management override
Cash Controls
•Cash is highly susceptible to theft
•What is cash?
Coins, currency, cheques, money orders
Money on hand or in bank
•General rule: if bank will accept for deposit, it is considered cash
Cash Receipts
•Over-the-counter, mail-in, and electronic funds transfer (EFT) receipts
•Internal control over cash receipts is more effective when cash receipts are deposited into the
bank account daily or are made by electronic funds transfer
•Other examples of control activities over cash receipts?
Cash Payments
•Control activities over cash payments are more effective when payments are made by cheque or
by electronic funds transfer (EFT), rather than in cash
•Good controls include:
Dual signatures on cheques
Segregation of duties
Use pre-numbered cheques and account for numerical continuity
Pay electronically instead of by cheque
•Other examples of control activities over cash
payments?
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