Internal Controls

Internal controls are policies, procedures, and technical safeguards that protect an organization’s asse
preventing errors and inappropriate actions.

Importance of Internal Conrols

1. As stated by Deloitte, “While relief may be available in reporting timelines, management remains
accountable for providing investors, regulators, and other stakeholders with relevant and timely informa
about operational and financial performance. Consequently, internal controls are critical to instilling
confidence in reliable financial reporting and disclosures.”
Provide reasonable assurance about the reliability and accuracy of financial information;
2 Identify and rectify any discrepancies or errors in financial statements;
3. Promote greater transparency and accountability in the reporting process;
4. Prevent fraud;
5. Facilitate internal and external audits.

● In Audit, auditors review the internal control process by performing walkthroughs to assess the overa
of material misstatement to the financial statements.

Types of Internal Controls

1. Preventive
prevent an adverse event from occurring; are the best kind of controls because they lessen the need t
detect mistakes after the fact

2. Detective

detect an error problem after it has occurred; will discover an issue before it becomes a significant pro

3. Corrective
are implemented after the internal detective controls discover a problem; could include disciplinary a
report filing, software patches or modifications, and new policies; usually put into place after a root ca
investigation

Exmples of Preventive Controls

1. Segregation of Duties

designed to reduce the incidence of mistakes or fraud by assuring that no single employee has the pot
to both perpetrate and hide errors or fraud in the course of his or her activities
The primary incompatible responsibilities that must be separated are:
● Performing transactions
● Authorization or acceptance
● Reconciliations
● Asset custodianship

2. Access Controls
● govern who or what has access to corporate assets, including IT systems.
●users should only access system functions and data that are necessary for the user to do his or her jo

3. Pre-Employment Screening

a procedure where employers check candidates’ backgrounds, screen them for drugs, check reference
assess their conduct; it is used in the recruiting process to screen out many undesirable candidates be
investing in the onboarding process

Example of Detective Internal Controls

1. Internal Audits
● evaluate compliance with company procedures, applicable laws, and international standards
● data and reports are reviewed to assure consistency and compliance

2. Reconciliations and Financial Reporting

● Reconciliations are performed to verify financial reporting among various sources
● Financial reporting documents the company’s revenues, spending, cash flow, and financial health

3. Physical Inventory Counts

● performed periodically to assure actual inventories match what is recorded in business systems and fi
statements
● Inventory discrepancy investigations can reveal system issues, inadvertent errors, and theft.

Examples of Corrective Internal Controls

1. Patch Management
process of delivering and installing software updates

2. New or Updated Policies and Procedures

policies and procedures may be updated when an audit or other detective control identifies a gap in
processes

3. Disciplinary Actions
corrective actions taken in response to employee misbehavior, rule violations, or poor performance

Benefits of Internal Controls

1. Early Warning System
2. Prevents Fraud
3. Avoids External Audit Findings and Regulatory Fines

Limitations of Internal Control

1. Collusion/Connivance
2. Human Error
3. Unforseen Circumstances

Source:
https://reciprocity.com/resources/what-are-the-3-types-of-internal-controls/
https://reciprocity.com/blog/5-most-common-types-of-internal-accounting-controls/
 protect an organization’s assets by

lines, management remains

ith relevant and timely information
rols are critical to instilling
P&A
cial information;

ss;

alkthroughs to assess the overall risk

because they lessen the need to

ore it becomes a significant problem

m; could include disciplinary action,

y put into place after a root cause

no single employee has the potential

ctivities
ms.
for the user to do his or her job

hem for drugs, check references, and

any undesirable candidates before

ternational standards

ous sources
h flow, and financial health
ded in business systems and financial
ent errors, and theft.
AR and AP Schedule
Lapsing Schedule Consignor Company-----------> Co
Inventory List consigned goods in the hands of
List to Floor existence merchandise in transit
Floor to List completeness inventory received on consignme
Cash in Bank: Bank and Books

ve control identifies a gap in

ations, or poor performance

 trols/
ting-controls/
nsignor Company-----------> Consignee Company
nsigned goods in the hands of the consignee
rchandise in transit sold under the terms FOB Destination bought under the terms FOB Shipping Poit
entory received on consignment x inventory x list
hipping Poit
Imprest Fund System
● All cash receipts should be deposited intact in a bank, and all cash disbursements be made thru issua

Prepare a
Issue an
Summary of
Cash is Received Official Cash
Receipt Collection

Billing
Prepare a Issue a
Statement
Check Check
/Invoice is
Voucher
received

Receive OR
from
Supplier

Disbursements
for which the
issuance of a
check is
impractical.

Payment is Prepare
made thru Petty Iissue
Petty Cash Payment
Cash Fund Voucher

Receive
OR/supporti
ng docs

IOU
rsements be made thru issuance of check.

Deposit Cash to Trace

Deposit in
Bank (Depsoit audit trail
the Bank
Slip)
Statement

Trace Check
Issued in the
Bank Statement

Book records of Cash Receipts and Cash

Disbursements

Bank records of Deposits and Withdrawals

Prepare PCF
Replenishment
Must be reocnciled at the end of each
month thru the preparation of Bank
Reconciliation Statement
Accounting for Petty Cash Fund
Quiz # 56 page 549
Petty Cash Fund
a cash fund that is used to pay small or petty expenses
for which issuance of a check is impractical

2 methods
1. Imprest Fund System
2. Fluctuating Fund System

Given information
PCF = 1,000
PCF Custodian = Miss Lopez
Petty Vouchers
Petty Cash Box
Petty Cash Book

Imprest Fund System

Aug 31 Petty Cash Fund 1,000.00
Cash In Bank 1,000.00
Established PCF

5 Advances to Employees 160.00

Communication Expense 80.00
Purchases 72.00
 Supplies 384.00
Cash In Bank 696.00
Replenished PCF

6 Petty Cash Fund 1,000.00

Cash In Bank 1,000.00
Increased PCF

14 Perez, Drawing 500.00

Miscellneous Expense 200.00
Freight Out 150.00
Representation Expense 500.00
Supplies 300.00
Cash In Bank 1,650.00

Petty Cash Fund

Aug 31 Est 1,000.00
Sep 6 Inc 1,000.00
Balance 2,000.00 Sep 15 Dec 500.00
Balance 1,500.00
 What if PCF is decreased to P1,500?
Decrease the PCF to P1,500 on Sep 15.
Sep 15 Cash on Hand 500.00
Petty Cash Fund 500.00
Decreased PCF.

How to determine if a disbursement will be paid thru a check or thru PCF?

Based on Company Policy
P500 and below thru PCF
More than P500 thru issuance of check loan releases
Gcash for PLDT payments

How to ensure that the PCF is not used by the PC Custodian for personal expenses/transactions?
Conduct a SURPRISE Cash Count by Internal Auditor

Cash Count Sheet

Bills and Coins Quantity Amount
P1,000
P500
P200
P100 1 100.00
P50
P20 2 40.00
P10 1 10.00
P5
P1
25 Centavos
10 Centavos
5 Centavos
Total Bills and Coins 150.00

PCV Paid
PCV 1 Supplies 350.00
PCV 2 Transportation 500.00
PCV 3 Freight In 400.00
PCV 4 Representation 100.00
Total PCVs paid 1,350.00

Total of Bills and Coins and PCV Paid 1,500.00

PCF 1,500.00
Difference -
Best Practice in Accounting for PCf:
***Replenish your PCF at month end to ensure that expenses and other accounts paid using PCF are
 Fluctuating Fund System
Aug 31 Petty Cash Fund 1,000.00
Cash In Bank 1,000.00
Established PCF

Sep 2 Advances to Employees 160.00

Petty Cash Fund 160.00
PCV#1

3 Communication Expense 80.00

Petty Cash Fund 80.00
PCV#2

Purchases 72.00
Petty Cash Fund 72.00
PCV#3

Supplies 384.00
Petty Cash Fund 384.00
PCV#4

5 Petty Cash Fund 696.00

Cash In Bank 696.00
Replenished PCF
 6 Petty Cash Fund 1,000.00
Cash In Bank 1,000.00
Increased PCF

7 Perez, Drawing 500.00

Petty Cash Fund 500.00
PCV#5

8 Miscellneous Expense 200.00

Petty Cash Fund 200.00
PCV#6

10 Freight Out 150.00

Petty Cash Fund 150.00
PCV#7

11 Representation Expense 500.00

Petty Cash Fund 500.00
PCV#8

12 Supplies 300.00
Petty Cash Fund 300.00
PCV#9

14 Petty Cash Fund 1,650.00

Cash In Bank 1,650.00
Replenished PCF.

Petty Cash Fund

Aug 31 Est 1,000.00 Sep 2 PCV1 160.00
3 PCV2 80.00
PCV3 72.00
PCV4 384.00
depleted Balance 304.00
 Sep 5 Rep 696.00
Balance 1,000.00
Sep 6 Inc 1,000.00
Balance 2,000.00 Sep 7 PCV5 500.00
8 PCV6 200.00
10 PCV7 150.00
11 PCV8 500.00
12 PCV9 300.00
depleted Balance 350.00
Sep 14 Rep 1,650.00
Balance 2,000.00 Sep 15 Dec 500.00
Balance 1,500.00

What if PCF is decreased to P1,500?

Sep 15 Cash on Hand 500.00

Petty Cash Fund 500.00
Decreased PCF.

n releases thru a debit memo

ransactions?

What If? What if?

200.00 100

40.00 0
10.00 10
 250.00 110.00

350.00 350.00
500.00 500.00
400.00 400.00 Imprest Fund System
100.00 100.00
1,350.00 1,350.00 Replenishment:
Supplies
1,600.00 1,460.00 Transporation Expense
1,500.00 1,500.00 Freight In
100.00 (40.00) Representation Expense
Overage Shortage PCF Short/Over
Cash In Bank

Bills and Coins before replenishment

Replenishment
Bills and Coins after replenishment

PCF Short/Over
Payable to Petty Cash Custodian

Replenishment:
Supplies
Transporation Expense
Freight In
Representation Expense
PCF Short/Over
Cash In Bank

Bills and Coins before replenishment

Replenishment
Bills and Coins after replenishment

Receivable from Petty Cash Custodian

PCF Short/Over
or

Miscellaneous Expense
PCF Short/Over
ccounts paid using PCF are updated
350.00
500.00
400.00
100.00
40.00 100.00
1,250.00

250.00
1,250.00
1,500.00

100.00 PCF Short/Over 100

100.00 Miscellaneous Income

350.00
500.00
400.00
100.00
40.00 100.00
1,390.00

110.00
1,390.00
1,500.00

40.00
40.00

40.00
40.00
100
Bank Reconciliation Statement
statement prepared at the end of each month
which brings into agreement the cash balance
per bank records and per book records

bank bank statement

statement issued by the bank showing the
beginning cash balance
deposits received by the bank Credits Increases
withdrawal paid by the bank Debits Decreases
ending cash balance = balance per bank

books General Ledger

Cash In Bank
Beg xxx Cash Payment CDJ Withdrawals
Deposit Cash Receipts CRJ
balance per book = End xxx
Requirement:
1. Prepare Bank Reconciliation Statement
2. Prepare adjusting journal entries for book reconciling ite
POV of Bank
Deposits Cash
Boulevard Sales Company

Withdrawals Boulevard Sales Company

Cash

Difference
Sources:
1. Receipts recorded in the books but not yet reflected in the bank statement Deposit in Transit
Bank Reconciling Item
Book Bank
Receipts
Increase x +

2. Receipts recorded in the bank statement but not yet reflected in the books Credit Memo
Bank Book Book Reconciling
Receipts
Increase x +

3. Book errors in recording receipts Book reconciling

Understated receipts Collected the account of the customer for P10,000 but was recorde
Overstated receipts Sold merchandise for P20,000 but was recorded as P22,000

4. Bank errors in recording receipts Bank reconciling

Understated receipts Bel Company's deposit was credited by the bank erroenously to Bel
Overstated receipts Belle Company's deposit was credited by the bank erroneously to Be

5. Disbrusements recorded in the books but not yet reflected in the bank statement Outstanding Checks
Bank reconciling item
 Book Bank
Disbursement
Decrease x - Post-dated checks
today Oct 28
check is dated Nov 4

Staled checks
"panis"
today Oct 28
check is dated Jan 10, 2022

Unissued Checks

6. Disbursements recorded iby the bank but not yet refected in the books Debit Memo
Bank Book Book reconciling item
Disbursement
Decrease x -

7. Book errors in recording disbursements Book reconciling item

Understated Paid P1,500 for Utilties but the amount was recorded in the books as P150
Overstated Issued check #123 for P5,450 in payment for supplies amounting to P4,550
 8. Banks errors in recording withdrawals
Understatement check issued by Bel Company was erroneously charged against Belle
Overstatement checks issued by Belle Company was erroneously charged against Be

s for book reconciling items

posit in Transit on hand / for deposit
nk Reconciling Item deposited already but because of cut-off time, it was not reflected in the bank statement
Oct 31 deposit 10,000
cut-off time 11:00 AM before or at 11 am will be reflected as deposit on Oct 31
after 11 am will be reflected as deposits on the next banking

edit Memo that the depositors' / company's account is credited by the bank
ok Reconciling 1. Proceeds of Loan directly credited to the company's account
2. Collection of receivables directly deposited by the customer to the bank

10,000 but was recorded as P1,000 Book Add back 9000

ded as P22,000 Book Deduct 2,000

bank erroenously to Belle Company Bank Add back

e bank erroneously to Bel Company BAnk Deduct

tstanding Checks checks already issued to the payee but the payee has not yet presented
nk reconciling item the check to the bank for deposit or for encashment
st-dated checks are not outstanding check
could have been issued to the payee
eck is dated Nov 4 but not yet negotiable instruments

led checks if the company is the payee for this check

request reissuance of check from your customer

eck is dated Jan 10, 2022

issued Checks checks to pay a disbursement

but not yet released to payee
as if the account is not yet

if unissued checks has been recorded:

Accounts Payable xxx Cash In Bank
Cash in Bank xxx Accounts Payable

if unissued checks has not yet been recorded:

No Entry

issued by the bank informing the company that it's

ok reconciling item account with the bank has been reduced

1. Bank Service Charge

2. Amortization oor Payment f Bank Loan
3. NSF Check / DAIF or DAUD
No Sufficient Fund Check
Collection of Customer's account
for which the customer has issued a check
Book: Bank:
Cash In Bank 100,000 Cash 100,000
Accounts Receivable 100,000 X Company

Accounts Receivable 100,000 upon bank's confirmation that the customer's a

Cash In Bank 100,000 X Company 100,000
Cash
ok reconciling item
books as P150 Deduct 1350
ting to P4,550 Add 900
sly charged against Belle Company Deduct
ously charged against Bel Company Add
e bank statement

ected as deposit on Oct 31

s deposits on the next banking date 3-Nov
Accounts Payable

customer's check
100,000 clearning

firmation that the customer's account has no sufficient balance

100,000
Problem 4 Page 369

Bank Statement
30-Mar 86,855 Balance per Bank

Book Balance
this is the company's first month of operations
Beg Balance 0
Cash Receipts 110,100.00
Cash Disbursments (21,670.00)
End Balance 88,430.00 Balance per Book

Scanning of the Bank

Debits 700 NSF Check Debit Memo
125 SC Debit Memo
Credits 7800 Credit Memo

Identify deposit in transit and errors in recording cash receipts / bank credits
Cash Receipts per book VS Bank Statement Credit
Deposit in Transit 12,000.00 Bank Reconciling Item Added

Identify outstanding checks and errors in recording cash payments/bank debits

Cash Disbursements per book VS Bank Statement Debit

Boulevard Sales Company

Bank Reconciliation Statement
March 31, 2018
Amounts in Philippine Peso

Balance Per Bank

Deposit in Transit
Outstanding Checks
Check #
 124 2,500.00
126 950.00
Adjusted Bank Balance

Balance Per Book

Credit Memo
Notes Receivable Collected by the Bank
Face Value 7,500.00
Interest Income 400.00
Collection charges (100.00)
Debit Memo
NSF Check 700.00
Bank Service Charge 125.00
Adjusted Book Balance

Adjusting Journal Entry:

Mar 31 Cash In Bank 7,800.00
AJE1 Bank Service Charge 100.00
Notes Receivable
Interest Income

AJ2 Accounts Receivable 700.00

Cash In Bank

AJE3 Bank Service Charge 125

Cash In Bank
Receipts Disbursements Check #
15,000.00 600.00 120
13,000.00 1,000.00 121
5,000.00 4,600.00 122
8,000.00 720.00 123
2,200.00 2,500.00 124 OC
14,000.00 16,200.00 1,600.00 125 Beg Balance
15,000.00 950.00 126 OC Cash Receipts
6,300.00 21,300.00 4,000.00 127 Cash Disbursm
10,000.00 1,200.00 128 End Balance
9,600.00 19,600.00 2,000.00 129
4,500.00 2,500.00 130
7,500.00 12,000.00 21,670.00
110,100.00

Book Deducted customers' dishonored check

Book Deducted service charge
Book Added Notes Receivable 7500
Interest Income 400
Collection charges -100
7800

What if: Per Book Per Bank

Check #130 2500 5,200
Check #130 2,500 250

86,855.00
12,000.00
(3,450.00)
95,405.00

88,430.00

Per Books
Beginning Cash Balance for April
Add Cash Receipts
7,800.00 Less Cash Disbursements
Book Balance, April 30

(825.00)
95,405.00

7,500.00 Cash In Bank

400.00 15,000.00
13,000.00
5,000.00
8,000.00
700.00 2,200.00
14,000.00
15,000.00
6,300.00
125.00 10,000.00
9,600.00
4,500.00
7,500.00
110,100.00
Balance 88,430.00
AJE 7,800.00
Adjusted Bal 95,405.00
xxx for succeeding months = adjusted book balance based on the bank reconciliation of the immediate pre
xxx adjusted book balance = adjusted bank balance
(xxx)
xxx

Book error Understatement of Disbursement Deduct

Book error Overstatment of Disbursement Add
Cash In Bank
600.00
1,000.00
4,600.00
720.00
2,500.00
1,600.00
950.00
4,000.00
1,200.00
2,000.00
2,500.00

21,670.00
AJE 2 700.00
AJE 3 125.00
nciliation of the immediate previous month