Chapter 16

Internal Control Affecting Assets

Cash handling = responsibility of the Finance department directly under the supervision of the Treasurer

Cash Handling

- Handling and depositing cash receipts

- Signing Checks
- Investing Idle Cash
- Maintaining custody of cash, marketable securities, and other negotiable assets

Other duties of the finance department

- Forecast cash requirements

- Make both short-term and long-term financing arrangements

The functions of the finance department and accounting department should be represented in
the manner that it gives security that

1. All cash that should have been received was in fact received, recorded accurately and
deposited promptly.
2. Cash disbursements have been made for authorized purposes only and have been properly
cleared.
3. Cash balances are maintained at adequate, but not excessive, levels by forecasting expected
cash receipts and payments related to normal operations. The need for obtaining loans for
investing excess cash is thus made known on a timely basis.

Potential Misstatements – Cash Receipts

Recording fictitious cash receipts

Failure to record receipts from cash sales

Failure to record cash from collection of accounts receivable

Early (late) recognition of cash receipts – “cutoff problems”

Potential Misstatements – Cash Disbursements

Inaccurate recording of a purchase or disbursement

Duplicate recording and payment of purchases

Unrecorded disbursements
 Internal Control Over Financial Investments

Most important group of financial investments

- Marketable stocks and bonds

Because they are frequently higher than of peso value and other kinds of investment holdings

Other types
- Commercial paper issued by corporations
- Mortgages and trust deeds
- Cash surrender value of life insurance policies

- The internal auditors must be concerned about derivatives that are used to hedge various
financial and operational risks or for speculation.

- Derivatives are financial instruments that “derive” their value from other financial instruments,
underlying assets, or indexes.

MATTER OF READING NA SUNOD

Potential Misstatements – Financial Investments

Misstatement of recorded value of investments

Unauthorized investment transactions

Incomplete recording of investments

Internal Control Over Receivables

AR is a wide variety of receivables not only limited to the claims against customers for the sale of goods
and services

The ff are other varieties of AR

- Loans to officers or employees

- Loans to subsidiaries
- Claims against various other firms
- Claims for tax refunds
- Advantage to Suppliers
 Sources and Nature of Notes Receivable
What is NR?
They are written promises to pay certain amount at future dates.
NR is used in handling transactions of significant amounts and it is also widely used in the
industry.
Many financial institutions such as banks uses notes receivable and it constitutes as the single
most important asset.

Internal Control of Accounts Receivable and Revenue

- Control Environment
- Risk Assessment
- Monitoring
- Accounting information and Communication system
- Control Activities

Control Environment
Matter of reading and explaining

Potential Misstatements – Revenue/ Receivables

Recording unearned revenue
Early (late) recognition of revenue – “cutoff error”
Recording revenue when significant uncertainties exist
Recording revenue when significant services still must be performed by seller
Over estimation of the amount of revenue earned

Sources and Nature of Inventories and Cost of Goods Sold

Inventories
1. Goods on hand ready for sale, whether the merchandise of a trading concern or the finished
goods of a manufacturer
2. Goods in the process of production
3. Goods to be consumed directly or indirectly in production, such as raw materials, purchased
parts, and supplies.
Internal Control over Inventories and Cost of Goods Sold

In the viewpoint of the management and the auditors this is overemphasized. (idk if mean ba
ana kay ma overlook ra)

The management team of companies stresses control over cash and securities but little to none
in inventories since it is not particularly susceptible to theft as they think it is unnecessary to
have such control over it.

This kind of ignoring affects nearly all the functions in producing that is why we should not
overlook this area.

Potential Misstatements – Inventory/ Cost of Goods Sold

Misstatement of the inventory costs

Misstatement of inventory quantities

Early (late) recognition of purchases – “cutoff problems”

Internal Control over Plant and Equipment

PE represents a large portion of the total assets of a company and in industries at large.

Maintenance, rearrangement and depreciation of these PE are major expenses in the income
statement. It is very crucial to monitor this part of the financial statements as huge amounts
follows huge opportunities for corruption and fraud.

In large enterprises, the auditor may expect to find an annual plant budget used to forecast and
control acquisitions and retirements of a plant and equipment.

Significant amount of embezzlement could bring down the company if they target Plant and
Equipment.

A detailed knowledge of the quantities and condition of the existing equipment is essential basis
for an excellent forecasting and to prevent untimely replacements and addition just for the
purpose of corruption.

Potential Misstatements – Investments in Property, Plant and Equipment

Misstatement of acquisition of property, plant and equipment

Failure to record retirements of property, plant and equipment

Improper reporting of unusual transactions