Textbook Notes (362,734)
Canada (158,032)
MGAB01H3 (126)
G.Quan Fun (21)
Chapter 7

Chapter 7 notes

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University of Toronto Scarborough
Financial Accounting
G.Quan Fun

Chapter 7 Internal Control and Cash Notes Internal Control N internal control consists of all the related methods and measures adopted within a company to help it achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations N good internal control systems have the five primary components listed here: o control environmentit is the responsibility of management to make it clear that the organization values integrity, and that unethical activity will not be tolerated (often referred to as setting the tone at the top o risk assessmentcompanies must identify and analyze the various factors that create risk for the business and determine how to manage these risks o control activitiesto reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company o information and communicationthe system must capture and communicate all pertinent information both down and up the organization and communicate it to appropriate external parties o monitoringinternal control systems must be monitored periodically for their adequacy; significant deficiencies need to be reported to management andor the board of directors Control Activities N specific control activities that are used by a company will vary depending on managements assessment of these risks N this assessment is also heavily influenced by the size and nature of the company N control activities that apply to most companies include the following: authorization of transaction and activities; segregation of duties; documentation; physical controls; independent checks of performance; human resource controls Authorization of Transactions and Activities N an essential characteristic of internal control is the assignment or responsibility to specific employees N this control activity is most effective when only one person is authorized to perform a specific task N establishing responsibility is significantly easier when there is a system for proper authorization N in addition, it is important that policies be established by the right individuals or departments N the policies that are established also typically require written credit approval for sales transactions above a certain value Segregation of Duties N essential in a system of internal control because the responsibility for related activities should be assigned to different individuals N when the same individual is responsible for related activities, the potential for errors and irregularities is increased N in general, the following categories of activities should be separated from one another: authorization of transactions and activities; recording of transactions; and custody of assets N when the responsibilities for ordering, receiving, and paying are assigned to different individuals, risk of abuses is much lower N related sales activities should also be assigned to different individuals N in summary, segregation of duties means that responsibilities should be divided up so that one person cannot both commit a fraud and cover it up N in addition, the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee as this helps ensure the accuracy of the accounting records Documentation N documentation provide evidence that transactions and events have occurred N procedures should be established for documents N first, whenever possible, documents should be pre-numbered and all documents should be accounted for N pre-numbering helps prevent a transaction from being recorded more than once or, conversely, from not being recorded at all N second, documents that are source documents (the original receipts) for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction N this control contributes to the accuracy and reliability of the accounting records Physical Controls N it is essential to have controls that protect assets and records, or else they can be stolen, damaged, or lost N physical controls include: o safes, vaults, and safety deposit boxes for cash and business papers o locked warehouses and storage cabinets for inventories and records o computer facilities with password or biometric access o alarms to prevent break-ins o television monitors and garment sensors to deter theft o time clocks for recording time worked Independent Checks of Performance N independent review is necessary because employees can forget or intentionally fail to follow internal controls, or they might become careless if there is no one to observe and evaluate their performance N independent internal reviews are especially useful in comparing accounting records with existing assets to ensure that nothing has been stolen; three measures are recommended: 1. the review should be done periodically on a surprise basis 2. the review should be done by an employee who is independent of the personnel responsible for the information www.notesolution.com
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