Student workbook

FNSACC516
Implement and maintain internal control
procedures
 TAFE NSW would like to pay our respect and acknowledge Aboriginal and Torres Strait Islander Peoples as
the Traditional Custodians of the Land, Rivers and Sea. We acknowledge and pay our respect to the Elders,
both past and present of all Nations.

Version: 20200120

Date created: 21 August 2019

Date modified: 20/01/2020

For queries contact: Technology and business services SkillsPoint, TAFE NSW

© TAFE NSW 2020

RTO Provider Number 90003 | CRICOS Provider Code: 00591E

This resource can be found in the TAFE NSW Learning Bank.

The content in this document is copyright © TAFE NSW 2020 and should not be reproduced without the
permission of TAFE NSW. Information contained in this document is correct at time of printing: 10 August 2024.
For current information please refer to our website or your teacher as appropriate.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 2 of 48
© TAFE NSW 2020
 Contents
Icon legends.............................................................................................................................. 5
Getting started.......................................................................................................................... 6
What will I learn by completing this workbook?..................................................................6
Topic 1: Introduction to internal control..............................................................................7
Overview................................................................................................................................... 8
What is internal control?...........................................................................................................9
The need for internal control............................................................................................... 9
Objectives of internal control...............................................................................................9
Limitations in internal control systems...............................................................................10
Types of controls................................................................................................................ 11
Corporate governance.............................................................................................................16
Principles of good corporate governance...........................................................................17
Video: TelAll episode—an introduction to the One.Tel story.............................................18
Required reading and activities..........................................................................................19
Topic 2: Business risk.........................................................................................................20
Overview................................................................................................................................. 21
Required reading and activities..........................................................................................22
Topic 3: Internal audit and accounting system review........................................................23
Overview................................................................................................................................. 24
Internal control system............................................................................................................24
Accounting system.................................................................................................................. 25
Internal auditing......................................................................................................................25
Required reading and activities..........................................................................................26
Topic 4: Internal controls accounts receivable/payable......................................................27
Overview................................................................................................................................. 28
Transaction cycle controls....................................................................................................... 28
Sales and accounts receivable cycle...................................................................................29
Purchases and accounts payable cycle...............................................................................30
Cash and bank accounts..................................................................................................... 31
Required reading and activities..........................................................................................32
Topic 5: Internal controls stock, payroll and non-current assets.........................................33
Overview................................................................................................................................. 34
Inventory and production cycle...............................................................................................35
Payroll cycle.............................................................................................................................36
Non-current assets..................................................................................................................37
Required reading and activities..........................................................................................37
Topic 6: Other internal controls.........................................................................................38
Document title: FNSACC516_SW_1of1
Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 3 of 48
© TAFE NSW 2020
 Overview................................................................................................................................. 39
Non-current liabilities.........................................................................................................39
Investments........................................................................................................................39
Intangible assets.................................................................................................................39
Shareholders’ funds............................................................................................................40
Required reading and activities..........................................................................................40
Topic 7: Compliance testing...............................................................................................41
Overview................................................................................................................................. 42
Operational or performance audit..........................................................................................42
The auditor......................................................................................................................... 42
Required reading and activities..........................................................................................42
Topic 8: Internal control case study....................................................................................43
Overview................................................................................................................................. 44
Case study—Book Worm.........................................................................................................44
Image attributions...................................................................................................................45

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 4 of 48
© TAFE NSW 2020
 Icon legends
Icon Description

Practice activity

Learning activities help you to gain a clear understanding of the

content in this resource. It is important for you to complete these
activities, as they will enhance your learning. The activities will
prepare you for assessments.

Collaboration

You will have opportunities to collaborate with others during your

study. This could involve group activities such as mini projects or
discussions that will enable you to explore and expand your
understanding of the content.

Self-check

An activity that allows you to check your learning progress. The

self-check activity gives you the opportunity to identify areas of
learning where you could improve. If you identify these, you could
review the relevant content or activities.

Resources (required and suggested)

Additional resources throughout this workbook such as chapters

from textbooks, online articles, videos etc. These are
supplementary resources, which will enhance your learning
experience and may help you complete the unit.

Assessment task

At different stages throughout the workbook, after you have

completed the readings and activities, you may be prompted to
complete one or more of your assessment tasks.

Video

Videos will give you a deeper insight into the content covered in
this workbook. If you are working from a printed version, you will
need to look these up using the URL provided.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 5 of 48
© TAFE NSW 2020
Document title: FNSACC516_SW_1of1
Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 6 of 48
© TAFE NSW 2020
 Getting started
What will I learn by completing this workbook?
This workbook has been developed for the unit of competency FNSACC516 Implement and
maintain internal control procedures.

Each topic includes opportunities to check your progress and understanding as well as
activities that will help you to complete the formal assessments.

There are eight topics to complete within this workbook. They are:

1. Introduction to internal control.

2. Business risk.
3. Internal audit and accounting system review.
4. Internal controls account receivable/payable.
5. Internal controls stock, payroll and non-current assets.
6. Other internal controls.
7. Compliance testing.
8. Internal control case study.

The prescribed textbook for this unit Implement and maintain internal control procedures is:

 Internal control procedures by Matthew Fawcett and Lee Holmwood, 6th Edition,
ISBN:978-1760-730840.

This workbook is to be studied in conjunction with the recommended textbook.

Throughout this workbook, you will be prompted to practice self-testing exercises and
review questions from the recommended textbook.

Alright, let’s get started!

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 7 of 48
© TAFE NSW 2020
 Topic 1: Introduction to internal
control

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 8 of 48
© TAFE NSW 2020
 Overview
In this topic you will learn about:

 the concept of internal controls

 objectives and limitations of internal control systems
 types of controls
 corporate governance.

The activities throughout this resource will assist you in your learning. These activities do not
form a part of your final assessment however they will contribute to your understanding of
the topic area.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 9 of 48
© TAFE NSW 2020
 What is internal control?
A system of policies and procedures established by a business to control its operations. An
effective internal control system will ensure that:

 operations of the business are effective and efficient

 irregularities are prevented or detected and corrected if they occur
 assets of the operation are safeguarded (i.e. prevent assets being stolen, misused,
destroyed)
 financial records are an accurate reflection of the business’s operations and therefore
are a reliable source for management to base decisions.

Directors and management (not the external auditors) are responsible for the development
and implementation of an organisation’s internal controls.

The need for internal control

The need for Internal Control stems from the need for management to recapture some of
the control that is lost through delegation. For example an accounting system records,
processes and analyses data from a business’s operations.

Through this processing, the data is transformed into information which is used for decision
making. The accounting system must provide relevant and reliable information to
management for decision making. Internal controls will ensure the integrity of the
accounting system.

Objectives of internal control

 control operations by establishing various levels of authority to provide approval for
transactions
 safeguard the business’s assets from loss/damage because of waste, error, theft,
fraud, etc
 provide directors/shareholders/management with information that is timely and
accurate.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 10 of 48
© TAFE NSW 2020
 Limitations in internal control systems
Table 1 Overview of limitations

Limitation Overview

People make Internal control systems are designed by people and people make
mistakes. mistakes.

Collusion. Where the fraudulent activities of one person are concealed by

another person manipulating the records to conceal the fraud.

Cost/benefit The cost of implementing internal control must not be greater than the
ratio. benefits that will be obtained.

Unusual Controls are designed to monitor usual transactions, not unusual ones.
transactions.

Abuse of It allows the potential for an individual to abuse the control, for
responsibility. example, customer exceeds set credit limit but manager overrides
control and allows the extra shipment to proceed.

Internal control systems need to change as the organisation changes. If they don’t they may
become inadequate.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 11 of 48
© TAFE NSW 2020
 Types of controls
There are three types of control:

1. Objective controls.
2. Functional controls.
3. Time frame controls.

Objective controls
Table 2 Overview of objective controls

Control Overview

Preventative. Deter undesirable events from occurring., for example:

 a locked door
 fire drill
 a requirement of two signatures on cheques.

Detective. Detect and sometimes correct occurrence of undesirable events,

for example:

 smoke alarm
 observe payroll distribution
 oil light on a car.

Directive. Encourage or cause a desirable event. Examples include:

 traffic light
 competitive wages
 on-going training.

Adaptive controls. Controls that adjust to various situations in a changing

environment, for example:

 sunglasses
 thermostat
 access password.

Corrective controls. Correct problems identified by detective controls. Examples

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 12 of 48
© TAFE NSW 2020
 Control Overview

include:

 fire extinguisher
 transaction trail
 suspense accounts for rejected items.

Functional controls
These types of control cover the following:

 accounting controls
 administrative controls
 compliance controls
 operational controls
 legal controls.

Accounting controls
Accounting controls ensure integrity and accuracy of financial reports.

The desired attributes of an accounting information system are:

 completeness of information
 validity of transactions
 authorisation of transactions
 accuracy of information
 appropriate disclosure and presentation.

Some example of accounting controls is bank reconciliations, restricted access to assets or

sequentially pre-numbered invoices.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 13 of 48
© TAFE NSW 2020
 These controls ensure:

 adequate segregation of duties

 proper authorisation procedures
 adequate documents and records
 physical controls to safeguard assets.
 independent reconciliations and verifications.
 practice and procedure manuals
 clearly defined lines of responsibility and authority.

This means that as all transactions are authorised and specific employees are held
accountable for transactions authorised by them

Administrative controls
Administrative controls focus on operations with no direct link to accounting control. They
direct overall operations. Some examples are sales activity reports, production reviews and
analyses of sales by marketing division.

These controls ensure:

 business is conducted in an orderly, economical, efficient and effective manner

 assets are safeguarded
 employees are appropriately qualified for the responsibilities required of them
 decisions are made by authorised personnel
 the information produced is relevant and reliable.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 14 of 48
© TAFE NSW 2020
 Compliance controls
Compliance Controls focus on ensuring procedures, policies, laws etc. applicable to the
organisation are followed. Some examples are setting quality control standards or a pre-
approved vendor list.

There are seven main operational controls:

1. Planning.
2. Budgeting.
3. Accounting and information.
4. Documentation.
5. Authorisation.
6. Policies and procedures.
7. Orderliness.

Legal controls
Legal controls focus on the business operations remaining within the boundaries of local,
state and federal laws. Some examples include displaying OH&S (Occupational Health and
Safety) requirements and documenting all sexual harassment claims.

Figure 1 Legal advice service with a professional person.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 15 of 48
© TAFE NSW 2020
 Time frame controls
Table 3 Overview of controls

Control Overview

Input controls. Provide reasonable assurance that data received for processing is
authorised, in the correct form, is not lost, duplicated or
changed. Some examples are:

 limit checks
 range checks
 access denied print out for unauthorised user
 control totals.

Processing controls. Provides reasonable assurance that data processing has been
performed as intended without omission or double-counting of
transactions.

Many processing controls are the same as input controls but are
used in the processing phase. Examples include:

 overflow checks
 file labels and header labels
 management review of the operator log.

Output controls. Check on the accuracy of results and assure only authorised
persons have access to reports, files, etc.

Examples are:

 reconciliation of output to input for reasonableness

 documentation of report distribution.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 16 of 48
© TAFE NSW 2020
 Corporate governance
Corporate governance is concerned with how corporations are held accountable to all their
stakeholders and are, therefore, an important concept in managing business risk. It is the
system by which companies are controlled and direction is set It ensures the company is
accountable for its decisions and its performance.

Directors should use their best efforts to ensure that the company is properly managed and
constantly improved to protect and improve shareholder wealth and to meet the company’s
obligations to all parties with which the company interacts.

The Board of Directors plays a crucial role in good corporate governance. Directors have a
legal obligation under the Corporations Law to act:

 in good faith and honestly s181

 with reasonable care and diligence s180(1)
‘In good faith and honestly’ means:

 avoid conflicts of interest

 do not misuse a company’s property, information, or business opportunities
 disclose all financial benefits given by the company.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 17 of 48
© TAFE NSW 2020
 Principles of good corporate governance
Table 4 Overview of principles

Principle Overview

Lay solid foundations for  strategic guidance

management and oversight.  roles and responsibilities of board and
executives are clarified
 accountability.

Structure the board to add value.  competent

 independent judgment
 enhanced performance
 review performance.

Promote ethical and responsible  ethical standards are clear and

decision making. adherence encouraged.

Safeguard integrity in financial  ensure the truthful and factual

reporting. presentation of financials.

Make timely and balanced  promote timely and balanced

disclosure. disclosure of all material matters
concerning the company.

Respect the rights of shareholders.  protect shareholder’s rights

 communication
 access to information
 participation in meetings.

Recognise and manage risk.  a system in place to identify, assess

monitor and manage risk.

Remunerate fairly and responsibly.  a clear relationship between

performance and remuneration
 policy regarding exec remuneration is
understood by investors.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 18 of 48
© TAFE NSW 2020
 Watch

Video: TelAll episode—an introduction to the One.Tel story

The collapse of One.Tel provides an example of the importance of appropriate internal
controls. This video sets the scene and introduces the key players involved in the collapse
(duration 09:28).

https://www.youtube.com/watch?v=plzRWztR66Y

One.Tel, was a start-up communications company that launched in May 1995. By 1998
One.Tel had launched a global strategy which resulted in a significant overseas presence.
One.Tel was one of the most aggressive new entrants into the rapidly expanding
telecommunications market and was strong competition to Telstra and Optus. It grew from
nothing to one of Australia’s top 30 companies. One.Tel’s cofounders were Jodee Rich and
Bradley Keeling.

One.Tel entered the market as a reseller of Optus’ services. Targeting customers such as
young people, tradesmen, small businesses and sports clubs.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 19 of 48
© TAFE NSW 2020
 In September 1998, it took a fundamental turn, the acquisition of very expensive spectrum
licenses. News Ltd and PBL Ltd agreed to invest $430 million immediately and a further $280
million in the future in exchange for 40% shareholding. By 2000 One.Tel had rocketed to a
market capitalisation of $3.8 billion. But by 2001 the company was declared bankrupt.

The lessons that can be learnt from One.Tel’s demise

 spent too much time promoting and expanding one.tel and not enough time
concentrating on its operations and business systems.
 inadequate business planning
 internal controls were poor
 questionable ethics and values
 accounting procedures undermined
 lost sight of cash flows and financial performance
 failed to manage receivables and liabilities.

Resources

Required reading and activities

Read Chapter one of your textbook and complete the self-check exercises.

Complete the review questions and activities also for Chapter one as directed by your
teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 20 of 48
© TAFE NSW 2020
 Topic 2: Business risk

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 21 of 48
© TAFE NSW 2020
 Overview
Business risk is the exposure a company or organization must factor(s) that will lower its
profits or lead it to fail. Anything that threatens a company's ability to meet its target or
achieve its financial goals is called business risk.

Adequate internal controls should be in place to minimise operational risks and fraudulent
behaviour.

In this topic you will learn about:

 an overview of the risk assessment process.

The activities throughout this resource will assist you in your learning. These activities do not
form a part of your final assessment however they will contribute to your understanding of
the topic area.

Entities risk assessment process

An entity’s risk assessment process is its process for identifying and responding to business
risks and the results thereof. For financial reporting purposes, the entity’s risk assessment
process includes how management identifies risks relevant to the preparation of a financial
report that gives a true and fair view (or is presented fairly, in all material respects) in
accordance with the entity’s applicable financial reporting framework, estimates their
significance, assesses the likelihood of their occurrence, and decides upon actions to manage
them.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 22 of 48
© TAFE NSW 2020
 Risks can arise or change due to circumstances such as the following:

1. Changes in the operating environment. Changes in the regulatory or operating

environment can result in changes in competitive pressures and significantly different
risks.
2. New personnel. New personnel may have a different focus on or understanding of
internal control.
3. New or revamped information systems. Significant and rapid changes in information
systems can change the risk relating to internal control.
4. Rapid growth. The significant and rapid expansion of operations can strain controls
and increase the risk of a breakdown in controls.
5. New technology. Incorporating new technologies into production processes or
information systems may change the risk associated with internal control.
6. New business models, products, or activities. Entering business areas or transactions
with which an entity has little experience may introduce new risks associated with
internal control.
7. Corporate restructurings. Restructurings may be accompanied by staff reductions
and changes in supervision and segregation of duties that may change the risk
associated with internal control.
8. Expanded foreign operations. The expansion or acquisition of foreign operations
carries new and often unique risks that may affect internal control, for example,
additional or changed risks from foreign currency transactions.
9. New accounting pronouncements. Adoption of new accounting principles or
changing accounting principles may affect risks in preparing a financial report.

Resources

Required reading and activities

Read Chapter two, sections 2.1 to 2.9 in your textbook and complete the self-check
exercises.

Complete the review questions and activities for chapter two as directed by your teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 23 of 48
© TAFE NSW 2020
 Topic 3: Internal audit and
accounting system review

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 24 of 48
© TAFE NSW 2020
 Overview
In this topic you will learn about:

 internal control systems

 accounting systems
 internal auditing.

The activities throughout this resource will assist you in your learning. These activities do not
form a part of your final assessment however they will contribute to your understanding of
the topic area.

Internal control system

The procedures established by an entity to control its trading and accounting operations are
collectively referred to as internal control structure. Individual components of the structure
are called ‘internal controls’ or controls.

Effective internal control structure assists management by ensuring that the following five
objectives are achieved.

1. The business is conducted in an orderly and efficient manner, avoid

duplication, wastage and poor use of resources.

2. Ensure compliance with all financial and operational requirements.

3. Irregularities are prevented or detected and corrected, should they occur.

4. Assets are safeguarded from unauthorized use or disposition.

5. Financial records and other relevant databases completely and accurately

reflect the entire operational activities of the entity and permit the timely
preparation of financial information.

Figure 2 Objectives

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 25 of 48
© TAFE NSW 2020
 Internal control system/structure would use a combination of all the controls to improve the
accuracy and reliability of accounting and other forms of information. It also provides
management with the facility to safeguard assets; detect errors, irregularities and fraud.

This structure provides assurances that a business is properly managed.

Accounting system
An accounting system consists of source documents, records, procedures, personnel and all
the data processing methods used to transform transactions and other forms of data into
information.

The accounting system, therefore, provides the framework to collect, record, classify,
summarise, analyse and interpret information about financial transactions. This provides the
basis for both current and future decision making. An accounting system acts as a control
mechanism.

Accounting systems and internal controls are interrelated. Management uses accounting
records and the reports produced to make decisions.

Without sound internal controls, the information and reports produced from the MIS
(management information system) will be inaccurate, flawed and unusable.

Internal auditing
The responsibility for the designing, implementing and maintaining an internal control
structure rests with an organisation’s directors and management. Hence the independent
internal auditor should be appointed who reports directly to management. Regardless of
delegation, directors and management are still ultimately responsible for the preparation
and presentation of an entity’s financial reports.

An effective internal control structure should provide assurances to management about the
business and its’ operations. The nature and extent of the development and implementation
of these internal controls will vary between entities.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 26 of 48
© TAFE NSW 2020
 Reasons for maintaining accounting systems with strong internal controls:

1. -The Corporations Act requires that a company must keep accounting records in a
manner that will enable the company to prepare true and fair accounts, which may
be conveniently and properly audited.
2. Accounting systems with sound internal controls provide the basis for informed
decision making.
3. Accounting systems with sound internal controls help safeguard assets, prevent
irregularities and fraud, ensure accurate and reliable accounting records, promote
operational efficiency and encourage adherence to management policies.
4. Accounting systems with sound internal controls enables directors and senior
management to recapture some of the ‘lost control’ of an organisation’s day-to-day
operating activities, brought about by the need for delegation.

Resources

Required reading and activities

Read Chapter three, sections 3.1 to 3.9 of your textbook and complete the self-check
exercises.

Complete the review questions and activities also for Chapter three as directed by your
teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 27 of 48
© TAFE NSW 2020
 Topic 4: Internal controls
accounts receivable/payable

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 28 of 48
© TAFE NSW 2020
 Overview
In this topic you will learn about:

 transaction cycles for the accounts receivable, accounts payable and cash sub-
systems.

The activities throughout this resource will assist you in your learning. These activities do not
form a part of your final assessment however they will contribute to your understanding of
the topic area.

Transaction cycle controls

Although internal controls are generally classified as either administrative controls or
accounting controls, it is more practicable (for now) to identify these controls by reference
to the different transaction cycles, within an organisation’s accounting system.

Transaction cycles highlight the sequence of events that relate to a particular class of
transaction. The purpose of this is to determine the nature of the transaction system cycles
with respect to the types of transactions, accounting records affected and personnel
involved and to identify the information flow and the need for essential internal controls for
each transaction cycle.

The cycles can be classified as follows:

 sales and accounts receivable cycle

 purchases and accounts payable cycle
 cash and bank balances
 inventory and production cycle
 payroll cycle
 non-current assets.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 29 of 48
© TAFE NSW 2020
 Sales and accounts receivable cycle
The sales and accounts receivable cycle relate to all the activities associated with the
generation of sales and receipts from customers. It enables an organization to generate
revenues which then form the basis for deriving profits.

 internal control objectives for the sales and accounts receivable cycle
 nature of the sales and accounts receivable cycle
 transactions in the sales and accounts receivable cycle
 accounting records affected by the sales and accounts receivable cycle
 personnel in the sales and accounts receivable cycle
 information flow and the need for controls within the sales and accounts receivable
cycle (flowchart diagram):
o receiving and accepting customer orders
o credit approval
o releasing goods from stores
o shipping goods
o recording the sale and invoice preparation
o recording credit note details.
o mail receipts from customers
o banking receipts
o debt collection
o reconciliations completed and monthly statements prepared
o over-the-counter and cash sales.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 30 of 48
© TAFE NSW 2020
 Purchases and accounts payable cycle
includes all those activities that occur in relation to the purchase of inventory and payments
to suppliers.

Credit and cash purchases are the two major transactions classes here.

 internal control objectives for the purchase and accounts payable cycle
 nature of the purchases and accounts payable cycle
 transactions in the purchases and accounts payable cycle
 accounting records affected by the purchases and accounts payable cycle
 personnel within the purchases and accounts payable cycle
 info flow and the need for controls within the cycle. (flowchart diagram)
o requisitioning goods and services
o purchase order preparation
o receiving, counting and inspecting goods
o storing inventory
o recording the liability
o paying the liability
o cheque preparation and signing
o credit note procedures
o reconcile accounts.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 31 of 48
© TAFE NSW 2020
 Cash and bank accounts
Without cash, or the availability of cash, the making of profits is an academic issue. Without
cash, most organisations will fail. Cash therefore is probably the most important asset of
most organisations, as it is the most common means of exchange, and eventually most
transactions affect cash.

Cash is used to define money and other negotiable instruments such as:

 cheques
 money orders that financial institutions will accept as deposits.

Cash does NOT include:

 accounts receivable
 IOU’s
 post-dated cheques.

Because of its liquid nature, cash is susceptible to misuse, misappropriation or theft.

Therefore it is important to ensure that organisations have a sound system of internal
control to handle cash and cash balances.

 internal control objectives of cash and bank

 major controls over cash and bank. (flowchart diagram)
 physical controls.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 32 of 48
© TAFE NSW 2020
 Resources

Required reading and activities

Read Chapter four of your textbook and complete the self-check exercises.

Complete the review questions and activities also for Chapter four as directed by your
teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 33 of 48
© TAFE NSW 2020
 Topic 5: Internal controls stock,
payroll and non-current assets

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 34 of 48
© TAFE NSW 2020
 Overview
In this topic you will learn about:

 inventory and production cycles

 payroll cycle
 non-current assets.

The activities throughout this resource will assist you in your learning. These activities do not
form a part of your final assessment however they will contribute to your understanding of
the topic area.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 35 of 48
© TAFE NSW 2020
 Inventory and production cycle
This cycle for a company is unique, in that it interacts with the purchases, sales and payroll
cycles, as well as the cost of production.

Because of this interaction, all the activities associated with it (recording of services, costs of
production, wages and salaries) are of major interest.

The primary objective of controls in this cycle is to ensure that inventory is protected and
production is controlled and run on a cost-effective basis.

 internal control objectives for the inventory and production cycle

 nature of the inventory and production cycle
 transactions in the inventory and production cycle
 accounting records affected by the inventory and production cycle
 personnel in the inventory and production cycle
 information flow and the need for controls within the inventory and production
cycle:
o production initiated
o materials requisitioned
o raw material purchases
o raw material issues
o production commenced
o the production transferred to finished goods
o control over raw materials, WIP and finished goods inventory.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 36 of 48
© TAFE NSW 2020
 Payroll cycle
Includes all those transactions that occur in relation to the recruitment, timekeeping and
payment of employees for their services. Apart from wages and salaries, they also include
commissions, employee bonuses, employee benefits (long service leave, annual leave, health
insurance payments, super entitlements).

 internal control objectives for the payroll cycle

 nature of the payroll cycle
 transactions in the payroll cycle
 accounting records affected by the payroll cycle
 personnel in the payroll cycle
 information flow and the need for controls within the payroll cycle
o hiring and firing employees
o pay rates and allowances authorization
o timekeeping functions
o payroll preparation
o payroll authorization
o distribution of pay
o unclaimed wages
o recording the pays.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 37 of 48
© TAFE NSW 2020
 Non-current assets
Represent important parts, both in dollar value terms and their contribution in terms of
future benefits, to most business organisations. While many non-current assets are large and
difficult to remove, others are not, therefore it is important that strict control is maintained
over the entire range of non-current assets.

Controls over non-current assets should include:

 controls over acquisition and recording

 controls over the use and security of non-current assets
 controls over disposals.

Resources

Required reading and activities

Read Chapter five, sections 5.1 to 5.3 of your textbook and complete the self-check
exercises.

Complete the review questions and activities also for Chapter five as directed by your
teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 38 of 48
© TAFE NSW 2020
 Topic 6: Other internal controls

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 39 of 48
© TAFE NSW 2020
 Overview
In this topic, you will study internal controls associated with other accounting subsystems.
You will be studying a case study and internal controls for the following areas:

 non-current liabilities
 Investments
 intangible assets
 shareholders’ funds.

The activities throughout this resource will assist you in your learning. These activities do not
form a part of your final assessment however they will contribute to your understanding of
the topic area.

Non-current liabilities
Specific internal controls should include:

 maintenance of legal documentation and storing of this in a safe location

 maintenance of a register of liabilities to record interest, repayment and legal
commitment.

Investments
Specific internal controls should include:

 maintenance of an investment register

 documents should be stored in a secure location
 dividends and interest received should be recorded and banked correctly
 regular investment valuation should be completed
 investment performance should be analysed regularly.

Intangible assets
 should be included separately in the balance sheet in the non-current assets
 set balance day adjustment procedure authorised by management.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 40 of 48
© TAFE NSW 2020
 Shareholders’ funds
 maintenance of legal documentation, including share register, and storing of these in
a safe location
 transactions should be recorded in the general journal and ledger
 transfers to reserves and dividend declarations should be appropriately authorised
 cash should be available to be dividend liabilities
 appropriate staff should be assigned to monitor the recording of transactions.

Resources

Required reading and activities

Read Chapter six, sections 6.1 to 6.4 of your textbook and complete the self-check exercises.

Complete the review questions and activities also for Chapter six as directed by your
teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 41 of 48
© TAFE NSW 2020
 Topic 7: Compliance testing

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 42 of 48
© TAFE NSW 2020
 Overview
In this topic, you will study the steps involved in preparing a detailed internal control review.
This review will include the undertaking of an operational audit.

Operational or performance audit

An operational audit is an independent, systematic examination of all or part of an entity’s
programs, operations or activities to assess economy, efficiency and effectiveness.

One of the main objectives of an operational audit is to determine the adequacy of the
internal control system.

The auditor
Both internal and external auditors may perform operational audits. Internal auditors often
have the expertise required to perform the audit as they have a greater knowledge of the
business and its operations. External auditors are used when greater independence is a
priority.

The objectives of the operational auditor would include:

 identifying ways of improving value for money and control

 testing the internal control system to ensure it is operating in a satisfactory manner.

The performance audit should be able to identify fraud, weaknesses in the internal control
system and ineffective operations, practices and procedures.

Resources

Required reading and activities

Read Chapter seven, sections 7.1 to 7.11 of your textbook and complete the self-check
exercises.

Complete the review questions and activities also for Chapter seven as directed by your
teacher.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 43 of 48
© TAFE NSW 2020
Document title: FNSACC516_SW_1of1
Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 44 of 48
© TAFE NSW 2020
 Topic 8: Internal control case
study

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 45 of 48
© TAFE NSW 2020
 Overview
In this topic you will complete a detailed internal control case study of one company, Book
Worm.

Case study—Book Worm

Refer to chapter eight from your textbook to help you complete the required task.

The Case Study concerns the internal review of the sales department of Book Worm. The
internal auditor begins the review with the staffing of the department. The organisation and
responsibilities of the staff are then reviewed.

An operational audit addressing inventory variances is then conducted.

An annual audit planning meeting concerning the purchases transaction cycle is undertaken
to set objectives for the following financial year.

An operational audit of 800 purchase orders and a number of weaknesses found.

You will be required to write a report on eliminating these weaknesses.

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 46 of 48
© TAFE NSW 2020
 Image attributions
Image Page # Attribution

Cover 1 Quality control certification, checked guarantee of standard of

company product. © Getty Images copied under licence

Credit: anyaberkut Creative #: 1061357372

Topic 1 cover 7 Metal Wheel Concept - stock photo © Getty Images copied
under licence

Credit: EtiAmmos Creative #: 866973208

Figure 1 Legal 15 © Getty Images copied under licence

advice service
with a Credit: NicoElNino Creative #: 1065824400
professional
person.

Topic 2 cover 19 Risk chart - stock photo © Getty Images copied under licence

Credit: courtneyk Creative #: 175454347

Figure 3 cover Audit document icon in flat style © Getty Images copied
under licence

Credit: LysenkoAlexander Creative #: 1171652063

Figure 2 25 SmartArt graphic © TAFE NSW 2020

Objectives

Topic 4 cover Wheel, Cogwheel, Gear-Illustration © Getty Images copied

under licence
Topic 5 cover
Credit: erhui1979 Creative #: 469071636
Topic 6 cover

Topic 7 cover Clipboard compliance check © Getty Images copied

under licence

Credit:Lyubchik Prokopchuk Creative #: 1084231252

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 47 of 48
© TAFE NSW 2020
 Image Page # Attribution

Topic 8 cover Case Study concept on black chalkboard © Getty Images

copied under licence

Credit: SergeyVasutin Creative #: 1130670398

Document title: FNSACC516_SW_1of1

Resource ID: TBS_19_008_FNSACC516_SW_1of1 Page 48 of 48
© TAFE NSW 2020