College of Accountancy and Business Administration

Second Semester, A.Y. 2021-2022

ACC10
GOVERNANCE, BUSINESS ETHICS, RISK
MANAGEMENT AND INTERNAL CONTROL
REPORTING

Module 13 : Internal Control Affecting Liabilities

Lesson 1 and 2: Internal Control over Accounts Payables and
Other Debt

Submitted by:
Galope , Trina Krizza Mae
Manipon, Pauline M.
Palaganas, Shene J.
Tandaguen, Recille Ann E.

Submitted to:
Ma’am Aida Ganituen
ACC10 Instructor
 Module 13: Internal Control Affecting Liabilities

Learning Objectives:
1. Describe the Internal control over liabilities and equity, namely:
a. Payable
b. Other debts ( notes payable, bonds )
2. the possible misstatement due to error or fraud of the liability and equity
accounts, and how weakness in internal contributes to the risk of
misstatements.

Lesson 1: INTERNAL CONTROL OVER ACCOUNTS PAYABLE

Accounts payable
 Short term obligations arising from the purchases of goods and services.
 Typical transactions creating AP are acquisition on credit of merchandise,
raw materials, plant assets and office supplies.
 Referred to voucher payable for a voucher system
 Are amount due to vendors and suppliers for goods or services received
that not yet been paid.

Note:
 It is important to recognize that the Accounts Payable on company are
Accounts Receivables of other company.

 Invoices and statements from supplies usually evidence accounts payable

arising from the purchase of goods or services and most other liabilities.
However, accrued liabilities ( sometimes called accrued expenses )
generally accumulate over time, and management must make accounting
estimates of the year-end liability. Such estimates are often necessary for
salaries, pensions, interest, rent, taxes, and similar items.
 The clients creditors will generally maintain a complete records of their
receivables and will inform the client if payment is not received. The
feature aids auditors in the discovery of fraud, since the perpetrator must
be able to obtain and respond to the demands of payment.
 The self-interest of creditors constitutes an effective control in accounting
payable.
Potential Misstatements - Accounts Payable
Description of Examples Internal Control
Misstatements Weakness or Factors
that increase the risk
of misstatements
Inaccurate recording of Fraud Inadequate segregation
a purchased and of duties or record
- a bookkeeper prepares
disbursement keeping and recording
a check to himself and
cash disbursement or
record it as having been
check signer does not
issued to a major
review and cancel
supplier
supporting documents.

Error
Ineffective controls for
- a disbursement is matching invoices with
made to pay an invoice receiving documents
for goods that have not before disbursement is
received. authorized.

Misappropriation of Fraud Ineffective controls for

purchases matching invoices with
- goods are order but
receiving documents
not delivered to an
before disbursement is
inappropriate address
authorized.
and stolen.

Duplicate or recording Error Ineffective controls for

purchase review and cancellation
- a purchase is recorded
of supporting
when an invoice is
documents by the check
received from a vendor
signer.
and recorded again
when a duplicate is sent
by the vendor
Late (early) recording of Fraud Ineffective Board of
cost of purchased -’cut Directors, audit
- Purchased Journal
off problems’ committee, or internal
closely early with this
audit function, “tone at
 periods purchases as the top” not conductive
having occurred in to ethical conduct undue
subsequent period. pressure to meet
earnings target.

Lesson 2 : INTERNAL CONTROL OVER OTHER DEBTS

Businesses corporations obtain substantial amounts of their financial resources
by incurring debt and issuing capital stock. The acquisition and repayment of
capital is sometimes referred to as the Financing Cycle. This transaction cycle
includes the sequence of procedures for authorizing, executing, and recording
transactions that involve bank loans, mortgages, bonds payable, and capital
stock as well as the payment of interest and dividends.

Transactions and events whereby cash is obtained from or repaid to creditors or

owners.

Internal Control Over Debt

 Authorization by the Board of Directors
 Use of independent trustee
 Interest payments on bonds and notes payable

Authorization of Board of Directors

1. The bylaws of a corporation usually require that the Board of Directors
approve borrowings.
2. Treasurer prepares report on any proposed financing, explaining the need for
funds, effect in the financial position of borrowing upon future earnings and
compares it with others both before and after borrowing and alternative
methods of raising funds.
3. The BOD will issue an authorization that will include approval of such matters
as the choice of a bank or trustee, the type of security, registration with the
SEC, agreements with investments bankers, compliance with requirements of
the state of incorporation, and listing of bonds on securities and exchange.
4. After the issuance of long term debt, the board of Directors should receive a
report stating the net amount received and its disposition as fro example
acquisition of plant assets, addition to working capital, or other purposes.
Use of an Independent Trustee
Any company large enough to issue bonds and able to find a ready market for
the securities will almost utilize the services of a large bank as an independent
trustee.
Internal control is strengthened by the fact that the trustee does not have access
to the issuing company’s assets or accounting records and the fact that the
trustee is a large financial institution with legal responsibility for its actions.

Obligations of an Independent Trustee

The Trustee is charged with the protection of the creditors interests and with
monitoring the issuing company’s compliance with the provisions of the
indenture. The Trustee also maintains detailed records of the names and
addresses of the registered owners of the bonds, cancels old bond certificates
and issues new ones when bonds change ownership, follows procedures to
prevent over issuance of bond certificates, distribute interest payments, and
distributes principal payments when then bonds mature.

Interest Payments on Bonds and Notes Payable

Many corporations assign the entire task of paying interest to the trustee for
either bearer bonds or registered bonds. Highly effective control is then achieved,
since the company will issue a single check for the full amount of the semiannual
interest payment on the entire bond issue