Internal Control Basics
By:
LC Regencia
Silliman University
Contents
1 Internal Control Overview
2 Basic Internal Control Techniques
3 Accounting Cycles
4 Examples of Internal Controls
Hot Tip
“When large sums of money are
concerned, it is advisable to trust
nobody.”
Agatha Christie
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?
