Internal Control and Cash
ANSWERS TO QUESTIONS
Disagree. Internal control is also concerned with the safeguarding of company assets from em-
ployee theft, robbery, and unauthorized use.
The principles of internal control are: (a) establishment of responsibility, (b) segregation of duties,
(c) documentation procedures, (d) physical, mechanical, and electronic controls, (e) independent
internal verification, and (f) other controls.
This is a violation of the internal control principle of establishing responsibility. In this case, each
sales clerk should have a separate cash register or cash register drawer.
The two applications of segregation of duties are:
The responsibility for related activities should be assigned to different individuals.
The responsibility for establishing the accountability for an asset should be separate from the
physical custody of that asset.
Documentation procedures contribute to good internal control by providing evidence of the occur-
rence of transactions and events and, when signatures (or initials) are added, the documents
establish responsibility for the transactions. The prompt transmittal of documents to accounting
contributes to recording transactions in the proper period, and the prenumbering of documents
helps to ensure that a transaction is not recorded more than once or not at all.
Physical controls include safes, vaults, and locked warehouses. These controls contribute to the
safeguarding of company assets. Mechanical and electronic controls include cash registers and
computerized accounting equipment that contribute to the accuracy and reliability of the account-
ing records, and electronic burglary systems and sensors that help to safeguard assets.
Independent internal verification involves the review, comparison, and reconciliation of data
prepared by one or several employees.
Maximum benefit is obtained from independent internal verification when:
The verification is made periodically or on a surprise basis.
The verification is done by an employee who is independent of the personnel responsible
for the information.
Discrepancies and exceptions are reported to a management level that can take appro-
priate corrective action.
The concept of reasonable assurance means that the costs of establishing control procedures
should not exceed their expected benefit. Ordinarily, a system of internal control provides rea-
sonable but not absolute assurance, since absolute assurance would be too costly.
The human element is an important factor in a system of internal control. A good system may
become ineffective through employee fatigue, carelessness, and indifference. Moreover, inter-
nal control may become ineffective as a result of collusion.