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Section D: Specific functions of accounting & internal financial control D1. Accounting & finance functions within business D3. Internal financial control & security within business organisations D4. Fraud & fraudulent behaviour & their prevention in business Designed to give you knowledge and application of:

F1 D3 and D4: Internal financial control & security within business organisations and Fraud & fraudulent behaviour & their prevention in business  Explain internal control & internal check.  Describe the responsibilities of management for internal financial control.  Identify and describe features for protecting the security of IT systems and software within business.  Describe general & application systems controls in business.  Explain the circumstances under which fraud is likely to arise.  Identify different types of fraud in the organisation. Learning Outcomes

F1 Internal control Timely, reliable & accurate financial reporting Effectiveness & efficiency in all operations Compliance with all applicable laws & regulations Internal controls are processes that help ensure Accounting controls relate to areas such as: Administrative controls relate to areas such as: Safeguarding of assets e.g. inventory Prevention & detection of fraud & errors e.g. payment to workers Quality control e.g. production department prepares a monthly report on all defects. Work standards e.g. daily production reports are compared with industry standards Types of internal control

F1 Internal checks  Component of internal control  Continuous checks on day to day operations  Ensure policies / procedures are being properly carried out Internal checks Kelly Co divides the functions involved with purchasing goods amongst three employees Places purchase orders with suppliers Checks the delivered purchases Makes the payment Employee 1 Employee 2 Employee 3 An ideal system is one where following aspects of a transaction are entrusted to different persons:  Authorisation of a transaction  Execution of a transaction  Physical custody of the related asset, if required, and  Maintenance of records and documents

F1 Responsibilities of management for internal financial control Design an internal financial control system Continually monitor this system The board of directors are responsible to ensure the integrity of the organisation’s accounting and financial reporting It assigns this responsibility to management who must Ensure that an internal auditor periodically reviews / amends the internal control system Implement this system

F1 Main components of an IT system Data: raw information an organisation needs Hardware: physical technological devices e.g. computers, hard drives etc. System software: programs that will perform the necessary calculations, analysis etc on data Main components of an IT system  IT is the area that deals with all aspects of managing & processing information for organisations.  The main reason for having IT systems & software in an organisation is that important information can be stored, retrieved & analysed whenever needed. Organisation relies heavily on information to perform its operations; protecting its IT systems & software is a key priority. Refer to Example on page 240

F1 General controls Application control systems Fire  fire resistant materials  smoke detectors and fire extinguishers  control station Purpose to protect physical safety of an IT system Water  waterproofing  alarm systems  Location above water level Power fluctuations  back up generators  voltage stabilizers Purpose to protect / monitor the use of an IT system Unauthorised intrusion  physical: secure area  electronic: firewalls, software security systems Improper usage  audit trail General & application control systems Refer to Test Yourself 6 on page 243

F1 Fraud  When an organisation intentionally misstates its financial performance and position  Caused by either fraudulent financial reporting or misappropriation of assets Circumstances that increase the possibility of fraud  Poorly thought out or implemented internal control system  Ineffective management: pays little attention to the day to day operations of the organisation  Understaffed or inexperienced accounting and finance departments  Failure on part of management to correct weaknesses in internal controls  Periods of sustained losses Circumstances that indicate the possibility that fraud is taking place  Frequent changes in accountants & auditors  Existence of unnecessarily complex corporate structure  Unusual transactions: excessive payments for services to lawyers, consultants etc.  Sudden unexplainable increases in income  Inability / unwillingness of management to cooperate with auditors

F1 Types of fraud in the organisation Misappropriation of cash and assets Examples of cash fraud:  overstating supplier payments,  understating payments received from customers i.teaming & lading: to keep accounts moving, receipt from second customer posted to account of first customer ii.receipt from third customer posted to account of second customer & so forth. Fraudulent reporting / manipulating financial statements Examples include:  recording goods sent on consignment (trial basis) as final sales,  overvaluing inventory (finished goods) held and  deliberately misapplying accounting standards Two main types of fraud Reported $400 $4,000 Paid to supplier Actual Inventor y Reported Actual $400 $4,000 Refer to Example on page 249

F1 RECAP  Explain internal control & internal check?  Describe the responsibilities of management for internal financial control?  Identify and describe features for protecting the security of IT systems and software within business?  Describe general & application systems controls in business?  Explain the circumstances under which fraud is likely to arise?  Identify different types of fraud in the organisation?