Internal Control Basics

Contents

1 Internal Control Overview

2 Basic Internal Control Techniques

3 Accounting Cycles

4 Examples of Internal Controls

 Internal Controls Overview

 What are internal controls?

 Internal controls are the financial processes
and procedures that enable the organization
to safeguard its assets.

 How is this done?

 Who establishes the procedures?

 Standards of Internal Control
 Internal Controls should be designed to provide
reasonable assurance of the following concepts:

Safeguard • Assets are protected from loss,

alteration
Resources
• Access is authorized
• Transactions are authorized & timely
Reliable
recorded
Financial • Accounting records are accurate &
Information complete

Compliance • Established & approved policies &

with laws & procedures
regulations • Maintain budgetary control
 Find the Balance

Benefit to be
derived from
implementation

Cost to
implement the
control

Reasonable assurance recognizes that the cost of control should not exceed the benefit
to be derived. It also recognizes the need for integrity and a sound business culture and
judgment.
 Management Decision
The degree of control employed is
a matter of management’s
reasonable business judgment. Improve existing
controls through
increased supervision
and audits

When impractical or even Institute alternative or

impossible to institute an compensating
controls
internal control, as in the case
of a small operation,
management must chose Accept the risks
inherent with the
from among the listed control weakness
alternatives.
 Environment for Compliance

Management is responsible
for internal controls
• Establishment
• Documentation
• Maintenance
Tone at Management is ALSO for
the Top detecting improprieties
• Be alert for any indication
that a misappropriation,
Control irregularity, or theft
Techniques (fraud) exists

Monitor & Encourage open dialogue

Communication
Flow Evaluate and be receptive to listening
 What encourages fraud?
 Fraud Triangle

Even the best system of internal controls

cannot guarantee exemption from fraud.

OPPORTUNITY

Management can really only control Internal Controls in the fight against fraud.
 Sound internal control is best achieved by
a clearly defined process.
Basic Internal Control Techniques

Segregation of
Duties

Management
Access
Review

Approvals &
Reconciliations Authorization

These 5 basic internal controls can be incorporated into any accounting cycle
 Segregation of Duties
 Accounting and finance duties must be divided among staff to
ensure no one person has too much control.
 Promotes the concept of having employees cross-trained in multiple
areas so that operations continue uninterrupted in the event of a
long-term absence of an associate.
 Minimizes the risk of loss because more than one person is involved
in the process. Generally would need collusion of two or more
associates to successfully defraud the organization.

 Key concepts include:

 1. Separation of Custody of Assets from Accounting
 2. Separation of Authorization of Transactions from Custody of Assets
 3. Separation of Operational Responsibility from Record-Keeping Responsibility
 4. Separation of Duties within Electronic Data Processing (often non-existent due
to absence of IT Dept.)
 Control Access
 Employ the rule of “least privileges” for computer system
access – employees only have access to the systems
they need to do their immediate or cross-trained job
duties.
• Promptly remove/update access when an
associate terminates employment or
changes job role
• Keep blank check stock and other valuable
financial documents/items secured at all
times.
• Control access to the vault and/or key and
maintain a log to document who accessed
the documents.
• Sensitive and high value assets/inventory
are controlled and stored in a secured or
restricted area.
• Promptly remove former officials/employees
as check signers.
 Approvals & Authorization
 Transactions are approved by a responsible department
head and executed in accordance with applicable
general, budgetary, and/or specific policies and
procedures.
 Ensures an adequate audit trail when invoices include
evidence of authentication.
 Minimizes the risk of unauthorized funds being
expended.
 Supports healthy budgetary compliance.
 Reconciliation
 Validate two or more items to ensure consistency.
 Reconciliation is a key control to ensure that account
balances are accurate and that all financial information is
timely and properly recorded.

Examples of reconciliations include:

• Bank accounts are the most
commonly reconciled item.
• General ledger accounts to
subsidiary accounts or Account
Reconciliation
• Cash Reconciliation
• Reconciliation of a Cash Register
 Management Review
 Management engages in review of activity, analyzing
and performing oversight of activities performed.
 Taking an active role in the financial process helps
Management remain diligent in understanding and
fulfilling their roles and responsibilities.
 Critical part of transaction cycle process - provides a
good line of defense against unauthorized transactions
getting through the system acting as a deterrent to fraud.
If people know someone is looking, they will be less
likely to attempt a fraud.
 Case-in-point
 The former city treasurer of Fairfax, Virginia, was convicted of
embezzling approximately $600,000 from the city treasury over a
six-year period. She executed this embezzlement scheme as
follows: When Fairfax residents used cash to pay their personal
property and real estate taxes, the city treasurer would keep the
currency. She would then record the tax collections within her
property tax records. However, she would not report these
collections to the city controller. To bring her records into agreement
with those of the controller, she would eventually record an adjusting
journal entry. Furthermore, when cash was received by the city
treasurer from the residents for such things as court fees and
business license fees, this cash would be recorded on a cash
register and deposited daily. The treasurer would steal portions of
the cash and make up any discrepancy in the bank deposit by
substituting miscellaneous checks she had received through the
mail that would not be missed when they were not recorded.
 Accounting Cycles

 Revenue & Cash receipts

 Procurement and Cash Disbursement
 Payroll
 Inventory Management
 Philippine Government

 Does our government implement internal

controls? Yes or No
 If yes, what are the basis?
 Example

 Revenue and Cash Receipts

 Principles of Internal Controls

 Several Really Laughable Monkeys Pick

Cherries But Rarely Eat Cherries
 Principles of Internal Controls
 Segregation of Duties
 Responsibilities Define
 Limit the Numbers of Those with Access to Cash or
Assets
 Minimize the Amount of Cash or Assets on Hand
 Physical Protection of Assets
 Cost/Benefit Analysis
 Bond Employees with Insurance
 Rotate Employees Through Positions
 External Audit Required
 Check Transactions by an Independent Party
 Reporting Assignments

 Legal Basis of Government Internal

Controls
 Internal Controls for Small Organizations
 Internal Controls for Medium-Sized
Organizations
 COSO Framework
 Sources
 http://nc.casaforchildren.org/files/public/community/programs/Grants/SampleInternalContr
ols.pdf
 https://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html
 https://www.k-state.edu/internalaudit/intcontr.html#element
 https://www.copedia.com/internal-controls.html
 http://ithandbook.ffiec.gov/media/27970/ots-activities_handbook_sec_340.pdf
 http://www.cu.edu/controller/accounting-handbook/internal-controls-compensating-
controls-effective-date-011708
 https://www.copedia.com/internal-controls.html
 http://smallbusiness.chron.com/seven-internal-control-procedures-accounting-76070.html
 http://www.ecgi.org/codes/documents/kpmg_internal_control_practical_guide.pdf
 https://www.mango.org.uk/guide/icexamples
 http://occ.gov/publications/publications-by-type/comptrollers-handbook/intcntrl.pdf
 http://ithandbook.ffiec.gov/media/27970/ots-activities_handbook_sec_340.pdf
 http://www.cu.edu/controller/accounting-handbook/internal-controls-compensating-
controls-effective-date-011708
 http://www.theiia.org/chapters/pubdocs/242/Internal_Controls_Basics_IIA_040709.pdf
 https://internalaudit.boisestate.edu/internalcont
 http://www.nonprofitaccountingbasics.org/reporting-operations/internal-controlsrolbasic/
 http://pagba.com/wp-content/uploads/2014/09/Strengthening-of-Internal-Control-.pdf
 Questions?