1. Chapter 7 Part 1 Internal Control

2. Learning Objectives
Define internal control and describe the components of internal control and control procedures
Apply internal controls to cash receipts and cash payments.

3. Learning Objective 1
Define internal control and describe the components of internal control and control procedures

4. What Is Internal Control, and How Can It Be Used to Protect a Company’s Assets?
A key responsibility of a business manager is to control operations. Internal control is the organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records.

5. What Is Internal Control, and How Can It Be Used to Protect a Company’s Assets?
Safeguards companies assets
Encourages employees to follow company policies
Promotes operational efficiency
Ensures accurate, reliable accounting records

6. Internal Control and the Sarbanes-Oxley Act
U.S. Congress passed a law requiring a public company to maintain a system of internal controls. The Sarbanes-Oxley Act (SOX) requires companies to review internal controls. Public companies must issue an internal control report.

7. The Components of Internal Control
Control procedures
Risk assessment
Information system
Monitoring of controls
Environment
Internal controls are monitored by internal auditors and external auditors.

8. Internal Control Procedures
Competent, reliable, and ethical personnel Assignment of responsibilities Separation of duties Audits Documents
Electronic devices
e-commerce
Encryption
Firewalls
Passwords and digital signatures
Other controls
Fireproof vaults
Alarms
Job rotation

9. The Limitations of Internal Control—Costs and Benefits
Internal controls cannot completely prevent fraud.
Collusion is when two or more people work together to beat internal controls.
The stricter the internal controls, the higher the costs.
Internal controls are judged based upon their cost versus benefit.

10. Learning Objective 2
Apply internal controls to cash receipts and cash payments.

11. Each source of cash has unique security measures.
What Are the Internal Control Procedures with Respect to Cash Receipts?
Cash receipts occur primarily when a business sells merchandise or services.
Each source of cash has unique security measures.
A receipt of cash over the counter in a store involves a point-of-sale terminal (cash register).

12. Cash Receipts by Mail
Companies receive checks by mail as payments for service or merchandise.
The control cycle starts in the mail room.
Employees record the checks received and forward them to the treasurer for deposit in the bank.
A remittance advice provides information about the payment.
A lock-box system is a post office box that belongs to a bank, and the bank deposits the funds on behalf of the company.

13. What Are the Internal Control Procedures with Respect to Cash Payments?
Companies make many payments by check.
Payments by check provide internal controls:
A check provides a record of the payment.
A check requires a signature by an authorized official.
Supporting evidence is reviewed prior to signing the check.

14. Controls Over Payment by Check
Technology streamlines payment procedures: Evaluated Receipts Settlement (ERS) is a single-step payment approval process. Electronic Data Interchange (EDI) is a streamlined system that communicates inventory levels between vendors and retailers.