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Internal Control

Internal Control. Chapter 12. Internal Control. What Is Internal Control? What Are the Major Objectives of Internal Control? What Are the Differences Between Accounting and Administrative Controls?. Internal Control. What Are the Characteristics or Principles of Internal Control?

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Internal Control

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  1. Internal Control Chapter 12

  2. Internal Control • What Is Internal Control? • What Are the Major Objectives of Internal Control? • What Are the Differences Between Accounting and Administrative Controls?

  3. Internal Control • What Are the Characteristics or Principles of Internal Control? • How Are Internal Controls Documented?

  4. Internal Control • How Is Flowcharting Useful in Documenting and Monitoring Internal Control? • How Does the Segregation of Duties Enhance Internal Control? • What Methods of Internal Control Are Necessary to Safeguard Cash?

  5. Conditions For Fraud and Embezzlement • Need • Opportunity • Failure of Conscience

  6. The Industry’s Vulnerability • Cash Business • Many Transactions • Low Skill Employees • Perception of Industry As Low Social Status

  7. The Industry’s Vulnerability • Items Used Have “Street Value” • Items Used Are Used by General Population

  8. AICPA Objectives of Internal Control • Safeguard Assets • Check Accuracy and Reliability of Accounting Data • Promote Operational Efficiency • Encourage Adherence to Prescribed Managerial Policies

  9. Types of Internal Control • Administrative - How the Company Operates • Accounting - Impact on Financial Statements

  10. Internal Control Basics • System Requires - Methods and Procedures; and Reliable Forms/reports • Larger the Company - More Internal Control Required

  11. Internal Accounting Control • Develop Long-Term Audit Program • Set Audit Policies • Conduct Financial Audits • Recommend Improvements • Check Management for Compliance • Review Operational Controls

  12. Internal Accounting Control • Monitor Corrective Actions Taken • Conduct Special Examinations of “Sensitive” Areas • Investigate Fraud • Assist the Audit Committee • Coordinate With Independent CPA Firm

  13. Classification of Controls Preventive Controls • Controls That Are Implemented Before a Problem Occurs Such As: Use of Locks or Segregation of Duties

  14. Classification of Controls Detective Controls • Controls Designed to Discover Problems and to Monitor Preventive Controls Such As External Audits or Surprise Cash Audits

  15. Characteristics of Internal Control • Management Leadership • Organizational Structure • Sound Practices • Fixed Responsibility

  16. Characteristics of Internal Control • Limited Access • Competent and Trustworthy Personnel • Segregation of Duties • Authorization Procedures

  17. Characteristics of Internal Control • Adequate Records • Procedure Manuals • Physical Controls • Budgets and Internal Reports • Independent Performance Checks

  18. Documenting Internal Control • Flowcharting • Internal Control Questionnaire • Narrative

  19. Code of Ethics • Many Hospitality Companies Have Adopted Code of Ethics • General Managers and Department Heads are Responsible for Advising Employees Under Their Supervision of the Parts of the Code That Apply to Them and Their Duties

  20. Most Frequent Elements in Codes of Ethics • Privacy of Communication • Conflict of Interest • Political Contributions in the U.S. • Company Records • Gifts, Favors, Entertainment, Trips and Outings

  21. Most Frequent Elements in Codes of Ethics • Use of Company Assets • Anti-Trust Laws • Relations With Competitors • Relations With Suppliers • Relationships With Customers

  22. Examples of Internal Control • Cash • Bank accounts reconciled monthly • Reconciliation done by independent party • General Cashier needs to take a vacation 1 - 2 times a year • Surprise cash counts • Checks received should be endorsed

  23. Examples of Internal Controls • Accounts Receivable • Same person collects money does not record payment • Mgmt authorizes and write-offs or adjustments • Accounts Payable • Need invoice to pay • Invoices need to match to PO • Vendor must in system

  24. Examples of Internal Controls • Purchasing • PO system needs to be used • Separate duties for Ordering and Receiving • Payroll • Spvr or Mgr need to approve time sheets • Payroll separate from HR • Undelivered checks returned to CFO

  25. Examples of Internal Controls • Inventories • Keep valuables locked away • Keep minimal level on hand • Take a physical inventory periodically • Use 2 or more staff to do inventory • Fixed Assets • Annual inventory • Proper approvals prior to purchase or disposal

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