ACCOUNTING

Lesson:

An internal control system (ICS) is a set of procedures and policies undertaken by an entity to safeguard
its assets and to ensure they have been used effectively and efficiently to its economic benefit.

An internal control can either be for administrative or accounting purposes. Controls are generally used
to prevent (or minimize) errors and irregularities.

Accounting controls are designed to safeguard the assets from theft or unauthorized use; whilst
administrative controls are designed to promote efficiency of operations in the business.

An Internal control system allows the entity to examine several objectives:

 Compliance with company policies, regulations and government laws

 Assurances regarding the achievement of company goals and objectives
 Assess the operating effectiveness of the organization and its structure
 Identify social and ethical issues (arising) in its financial reporting.
 Discourage possibilities of errors and irregularities occurring

An internal accounting control system should provide reasonable assurance in the following areas-:

 Authorization of transactions [those responsible are those who act]

 Recording of all authorized transactions correctly [account, period, amount]
 Safe keeping of assets [precautions and procedures to restrict access]
 Reconciliation of reports [match and agree with against independently prepared statements]
 Valuation of assets and liabilities [via periodic reviews for impairment and write-down]

An internal control system revolves around seven tenets:

 Segregation of duties [one person keeps the asset; but another records its contribution]
 Adequacy of documentation [well constructed documents produce good records for control]
 Independent internal verification [task are organized so that each stage validates the previous]
 Proper authorization [transactions carried out as specified by management]
 Competency of personnel to act [establishing responsibility for actions taken]
 Physical safeguard of the assets [protecting the actual assets from damage, theft or misuse]
 Rotation of staff [staff should be shifted to prevent familiar and fraud]
ACCOUNTING

Lesson:

Internal Control System over inventory

The acquisition, storage and distribution of inventory (stock) are the duties of administration. This
involves

 Sending purchase orders to the suppliers

 Warehousing the goods received from the suppliers
 Accounting department pays for bona fide (confirmed) invoices
 Processing requisition from production

Goods received for inventory must be

 Accounted for by administration [correct supplier, type, quantity, cost]

 Verified via documentation and authorization [cross check order and authority]
 Secured and monitored [clerks, guards, etc]

Goods transferred from inventory to production/sales must be

 Requisitioned by the factory manager/sales department

 Accounted for by the stores (warehouse) manager
 Validated and verified by the stores clerk

Inventory is a very key asset. It must be safeguarded for economic benefits

 Security guards to prevent unauthorized removal of goods from premises

 Perimeter fence to prevent unauthorized access to goods from outside
 Identification badges/pins prevent unauthorized personnel from restrictive areas
ACCOUNTING

Lesson:

Internal Control System over cash

Cash (in accounting terms) comprises coins, notes, money orders, cheques (amounts in chequing
accounts) and amounts in savings accounts.

Cash is one of the vulnerable assets held by a business, because -:

 It can be easily concealed

 It can be easily misplaced
 It cannot be easily identified
 It has a high desirability value due to its liquidity

Controls over cash must be designed to -:

 Account for all cash transactions accurately

 Ensure sufficient cash is available to settle obligations (eg bills)which fall due
 Limit the amount of cash held in an idle state (instead of being invested)
 Prevent the loss of cash due to theft or fraud.

Internal Control System for receipts of cash

 Cash receipts should be recorded as soon as they have been received

 Cash receipts should be deposited in the bank or safe immediately
 Cash receipts should not be used to make cash payments simultaneously
 The person who receives the cash should not be the one disbursing it

Internal Control System for disbursement of cash

 Cash disbursements should be made by authorized personnel ONLY

 Cash disbursement documents (eg cheques, receipts) should be pre-numbered
 Cash disbursements should be accompanied by supporting documents (eg invoice)
 Personnel who approve disbursements should not be the ones signing them off
 Supporting documents for cash disbursement should stamp PAID as soon as payment occurs
 All supporting documents/vouchers should be kept on file for future reference
 Bank reconciliation statements should be prepared by a person independent of cash system