INTERNAL
CONTROL
AFFECTING
ASSETS
OBJECTIVES:
1.) Describe the internal control over the major components of
assets of a business enterprise namely
a. Cash
b. Financical Investments
c. Receivables
d. Inventories and related Cost of Good sold
e. Property, Plant and Equipment
2.) Understand the potential misstatements due to fraud and errors
of the assets accounts and how weakness in internal control
increases the risks of mistatements.
INTERNAL CONTROL OVER
CASH
TRANSACTIONS
CASH HANDLING ARE
THE RESPONSIBILITY
OF THE FINANCE
DEPARTMENT, UNDER
THE DIRECTOR OF THE
TREASURER.
depositing cash receipts
signing checks
investing idle cash
and maintaining custody of cash, marketable
securities, and other negotiable
assets.
Finance department and the accounting
department
PROVIDES ASSURANCE THAT:
1. All cash that should have been received was in fact
received, recorded accurately and deposited
promptly.
2. Cash disbursements have been made for authorized
purposes only and have been properly
recorded.
3. Cash balances are maintained at adequate, but not
excessive, levels by forecasting expected cash
receipts and payments related to normal operations.
Finance department and the accounting
department
PROVIDES ASSURANCE THAT:
1. All cash that should have been received was
in fact received, recorded accurately and
deposited
promptly.
2. Cash disbursements have been made for authorized
purposes only and have been properly
recorded.
3. Cash balances are maintained at adequate, but not
excessive, levels by forecasting expected cash
receipts and payments related to normal operations.
Finance department and the accounting
department
PROVIDES ASSURANCE THAT:
1. All cash that should have been received was in fact
received, recorded accurately and deposited
promptly.
2. Cash disbursements have been made for
authorized purposes only and have been
properly
recorded.
3. Cash balances are maintained at adequate, but not
excessive, levels by forecasting expected cash
receipts and payments related to normal operations.
Functions of the finance department and the
accounting department
PROVIDES ASSURANCE THAT:
1. All cash that should have been received was in fact
received, recorded accurately and deposited
promptly.
2. Cash disbursements have been made for authorized
purposes only and have been properly
recorded.
3. Cash balances are maintained at adequate,
but not excessive, levels by forecasting
expected cash
receipts and payments related to normal
operations made known on a timely basis.
1. Don't let one person handle the entire process
2. Separate cash handling from record-keeping
3. Centralize cash receiving
4. Record cash promptly
5. Encourage customers to ask for receipts
6. Deposit cash daily
7. Disburse payments by check or electronic transfer
8. Bank reconciliation by someone independent
9. Monitor cash flows against forecasts
POTENTIAL MISSTATEMENT
CASH RECEIPTS
Recording fictitious cash Failure to record receipts Early (late) recognition of
receipts from cash sales cash receipts “cutoff
problems”
Weakness:
·Lack of segregation
Head of HR of
duties of the functions
of access to cash and Weakness:
record keeping; no ·Inadequate supervisioof cashiers;
effective review of bank failure to encourage customers to Weakness:
reconciliations. obtain cash receipts. ·Ineffective board of doirectors,
audit commitee or internal audit
function
POTENTIAL MISSTATEMENT
CASH DISBURSEMENT
Inaccurate recording of a Duplicate recording and Unrecorded disbursement
purchase or disburesment payment of purchases
Head of HR
Weakness:
Weakness:
Weakness:
·Inadequate segregation of duties of ·Ineffective controls for
·Ineffective controlsover
record keeping and preparing cash review and cancellation of
record keeping dor abd
disbursements, or check signer does supporiting documents by
access to cash
not review adn canvcel supporting the check signer.
documents
INTERNAL CONTROL OVER
FINANCIAL
INVESTMENTS
MAJOR ELEMENTS
1. Formal Investment Policies
2. Investment Committee
4. Detailed Records
5. Security Registration
6. Periodic Inspections
7. Accounting Expertise
POTENTIAL MISSTATEMENT
FINANCIAL INVESTMENTS
Misstatement of recorded Unauthorized investment Incomplete recording of
value of investments transactions investments
Head of HR
Weakness:
Inadequate accounting manual;
incompetent accounting personnel. Weakness: Weakness:
Ineffective BOD, AC/IAF; not conducive a. Inadequate accounting manual;
·Inadequate segregation of duties of
to ethical conduct;unduer pressure to incompetent accounting personnel.
record keeping for and custody of
meet earnings targets. b. Inadequate monitoring by
securities.
internal auditors.
INTERNAL CONTROL OVER
RECEIVABLES
ACCOUNTS RECEIVABLE
• Claim against customers from sale of goods
• Loans to officers or employees
• Loans to subsidiaries
• Claims against various other refunds
• Tax refunds
• Advances to supplier
NOTES RECEIVABLE
• Written promises to pay certain amount in
the future
• Used for transactions with substantial
amount
• I banks and other financial institutions,
notes receivable usually constitutes the
single most important asset
INTERNAL
CONTROL OF
ACCOUNTS
RECEIVABLES
& REVENUES
CONTROL
ENVIRONMENT
IMPORTANT
BECAUSE OF RISK OF
INTENTIONAL
MISSTATEMENT OF
INDEPENDENT
INTEGRITY REVENUE AUDIT COMMITTEE
AND ETHICAL OF THE BOARD OF
FINANCIAL DIRECTORS AND
EFFECTIVE
REPORTING HOLDING INTERNAL AUDIT
EMPLOYEES FUNCTION
ACCOUNTABLE
RISK
ASSESSMENT
Risk of misstatement of revenue
POTENTIAL MISSTATEMENT
OF REVENUE
Recording of unearned Early or late recognition of Recording revenue when
revenue revenue significant uncertainties
exist
• Ineffective board of directors, • Ineffective board of • Ineffective board of
audit committee or internal audit directors, audit committee or directors, audit committee or
Head of HR
function internal audit function; undue internal audit function; undue
• Ineffective billing process pressure to meet sales target pressure to meet sales target
• Ineffective control for testing • Ineffective cutoff • Aggressive attitude of
invoices, input validation checks, procedures management toward
and computer reconciliation
financial reporting
• Inadequate accounting manual
POTENTIAL MISSTATEMENT
OF REVENUE
Recording revenue when Over estimation of the
significant still must be amount of revenue earned
performed by seller
• Ineffective board of • Ineffective board of directors, audit
directors, audit committee or committee or internal audit function;
internal audit function; undue incompetent individuals involved in
pressure to meet sales target the accounting procprocess
• Aggressive attitude of management
• Aggressive attitude of
toward financial reporting;
management toward financial
Incompetent personnel involved in
reporting
the estimation/accounting process
INTERNAL CONTROL OVER
NOTES
RECEIVABLE
1. THE ACCEPTANCE OR RENEWAL
OF NOTES BE AUTHORIZED IN
WRITING BY A RESPONSIBLE
OFFICIAL WHO DOES NOT HAVE
CUSTODY OF THE NOTES
2. THE CUSTODIAN OF
NOTES RECEIVABLE HAVE NO
ACCESS TO CASH OR
GENERAL ACCOUNTING
RECORDS
3. THE WRITE-OFF OF
DEFAULTED NOTES BE
APPROVED IN WRITING
BY RESPONSIBLE
OFFICIALS AND
EFFECTIVE PROCEDURES
ADOPTED FOR
SUBSEQUENT FOLLOW-
UP OF SUCH DEFAULTED
NOTES
INTERNAL CONTROL OVER
INVENTORIES
AND COST OF
GOODS SOLD
The importance of adequate
internal control over
inventories and cost of goods
sold from the viewpoint of
both management and the
auditors can be scarcely be
overemphasized.
POTENTIAL MISSTATEMENT
Recording of unearned
revenue Misstatements of Inventory
Quantities
Early or late recognition of
purchase
Misstatements of Inventory
Costs
INTERNAL CONTROL OVER
PROPERTY,
PLANTS, AND
EQUIPMENT
The amounts invested in
plant and equipment
represents a large portion of
total assets of many
industrial concerns.
POTENTIAL MISSTATEMENT
Recording of unearned
revenue Improper reporting of
unusual transactions
Failure to record retireents
of PPE
Misstatements of
acquisition of PPE
Thank you!
