ch 6 notes - I Internal control A Purpose of internal...

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I. Internal control A. Purpose of internal control 1. Most companies must delegate responsibilities and rely on formal procedures rather than personal contact in controlling business activities 2. Internal control system monitors and controls business activities 3. Functions a) Protect assets b) Ensure reliable accounting c) Promote efficient operations * Help managers plan operations d) Urge adherence to company policies * Prevent avoidable losses * Monitor company and employee performance B. Principles of internal control 1. Fundamental internal control principles apply to all companies 2. Establish responsibilities a) Responsibility for a task is clearly established and assigned to one person * Determine who is at fault 3. Maintain adequate records a) Protects assets * Less likely to be stolen b) Ensures that employees use prescribed procedures * Decreases the likelihood of errors 4. Insure assets and bond key employees a) Assets are adequately incurred b) An employee is bonded when a company purchases an insurance policy or a bond against losses from theft by that employee * Discourages theft because bonded employees know an independent bonding company will be involved when theft is uncovered c) Separates record keeping from custody of assets * A person who controls or has access to an asset must not keep the asset’s accounting records because this would make theft very easy * Theft requires colluding of two or more employees
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5. Divide responsibility for related transactions a) The work of one individual acts to check the work of another b) Separation of duties, not duplicated efforts 6. Apply technological controls a) Technology improves the effectiveness of controls * Electronic file records each cash sale * Cash register records the exact time an employee arrives and departs work 7. Perform regular and independent reviews a) Ensure procedures are followed by evaluating efficiency and effectiveness II. Technology and internal control A. Technology allows us quicker access to databases and information B. Improves managers’ abilities to monitor and control business activities C. Reduces processing errors 1. Mathematical errors are nearly eliminated 2. With less human involvement errors go unnoticed D. More extensive testing of records 1. Audit of electronic records includes more extensive testing because information is easily and rapidly accessed a) Can quickly analyze samples or even an entire database E. Limited evidence of processing 1. Fewer hard copies 2. Allows the designing and operating of information systems F. Crucial separation of duties 1. Yield some job eliminations or consolidations G. Increased e-commerce 1. New risks a) Credit card number theft
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ch 6 notes - I Internal control A Purpose of internal...

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