INTERNAL CONTROL AND CASH CHAPTER 7

1. Identify the principles of internal control activities 2. Explain the activities that help achieve internal control. The objectives of this lesson

An accountant of a Canadian charity embezzled $2 million dollar by putting donations into her personal bank account. An assistant bank manager stole more than $10 million from TD by making loans to fictitious companies. A controller of a Canadian manufacturing company paid himself $2 million more than his normal pay level by writing unauthorized checks. StoriesStories

The 2014 CPA Canada Fraud Survey clearly shows that most respondents are taking action to protect their financial information: the incidence of fraud in Canada remains widespread. Nearly a third (29 per cent) of the respondents report being victims of some form of financial fraud and 43 per cent know someone who has been a fraud victim. The most important type of fraud that business owners, managers and accountants must watch out is employee embezzlement. StoriesStories

Internal control is the process that management designs and implements to help an organization achieve: 1. Reliable financial reporting 2. Effective and efficient operations 3. Compliance with relevant laws and regulations such as Income Tax Act and IFRS 4. Safeguard or protect its assets INTERNAL CONTROL

Internal control is the responsibility of management. Management must create, implement and monitor the control activities. The accounting system (which is done through the accounting cycle? Unit 1? Hello?) is part of internal control.

CONTROL ACTIVITIES are policies and procedures which help ensure that management’s directions are followed. Specific control activities depend on size and type of the business. The 6 activities, which are listed in the next slide, apply to most companies.

Authorization Segregation of duties Documentation procedures Safeguarding assets and records Independent verification Other Controls INTERNAL CONTROL ACTIVITIES

Authorization (or Establishment of Responsibility) : Management must make sure that specific employees are responsible for specific tasks. Control is most effective when only one person is responsible for a given task. For example, since I am the only teacher teaching in this portable, I am responsible for the projector and document camera. Let’s say that this room is shared by 4 different teachers, then I will not feel responsible for projector and document camera. INTERNAL CONTROL ACTIVITY

Segregation of duties: This is the most important control activity. Duties should be divided up so that one person can not commit a fraud and cover it up. The work of one employee should provide a reliable basis for evaluating the work of another employee. INTERNAL CONTROL ACTIVITY

Segregation of duties: For example, at Bestbuy, what if same employee orders the merchandise and receives the merchandise. (This same person also does physical count at the end of the year.) He or she can arrange to have an order sent to his or her home. He or she will pretend that the merchandise is received by the company. INTERNAL CONTROL ACTIVITY

Segregation of duties: What if same person orders merchandise and pays the bill? He or she can place orders with a supplier (bestfriend) who gives her kickbacks. If nobody is supervising her work, then nobody will realize that the prices the company is paying for merchandise is too much. INTERNAL CONTROL ACTIVITY

Segregation of duties: For example, at Bestbuy, what if same employee orders the merchandise and receives the merchandise. This same person also does physical count at the end of the year. He or she can arrange does bookkeeping (who records and maintains “Merchandise Inventory” account) and manager of the storage room and does physical count at the end of the year? INTERNAL CONTROL ACTIVITY

Segregation of duties: 1. The responsibility for related activities (such as ordering and paying)should be assigned to different individuals. 2. The responsibility for accounting for an asset should be separate from the responsibility for physical custody of that asset. 3. HW / Classwork 4. P378 Ex 7-1 and P383 P7-1 INTERNAL CONTROL ACTIVITY