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Unformatted text preview: 7-9Assuming that the general category of transaction has already been authorized by top management, at least three employees or departments should usually participate in each transaction to achieve strong internal control. One employee approves the transaction after determining that the details conform to company policies, another employee records the transaction in the accounting records, and the third employee executes the transaction by releasing and/or taking custody of the related assets. (Note: the approval function may be omitted in an extremely simple transaction such as a cash sale not involving a check).7-24(a)Internal control is defined as a process, effected by the entitys board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objective regarding (1) reliable financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.(b)The definition includes the following concepts:(1)Internal control is as a processas a means to an end.(2)The process is effected by individuals not merely policy manuals, documents, and forms.(3)Internal control can only provide reasonable assurance, which means that the cost of internal control should not exceed the benefits derived.(4)Internal control is designed to achieve objectives in the three areas of reliable financial reporting, effectiveness and efficiency of operations, and compliance with laws and regulations.(c)The five components of internal control include:(1)The control environment.(2)Risk assessment.(3)The accounting information and communication system.(4)Control activities.(5)Monitoring.(d)The major limitations of internal control include:(1)Mistakes may be made in the performance of controls as a result of misunderstanding of instructions, mistakes of judgments, carelessness, distraction, or fatigue.distraction, or fatigue....
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This note was uploaded on 11/19/2010 for the course ACCOUNTING Auditing taught by Professor G during the Spring '10 term at Oakton.
- Spring '10