Definition: The principles of internal control are the concepts that require management to set procedures in place to ensure company assets are safeguarded. In other words, these are the principles management uses to establish the ways to protect company assets. The main internal control principles include: The subject of internal controls is always expanding
and this list of principles will probably expand in the future as well. This is just a list of the most common and influential ones. That being said, these principles are the basis by which management uses to create and implement the internal controls it establishes. In other words, these are the basic ideas of controls. They aren’t controls in and other themselves. Management must take these ideas and apply them to their specific business. Let’s take a look at an example. Segregation of duties is one of the most recognizable and common controls in most organizations, so we will look at that one. It’s a good control to make sure that the recording and record keeping functions are separate from the actual handling of cash. This is why the cashier is in charge of collecting cash from
customers and possibility delivering it to the bank deposit box. The bookkeeper or the accounting department is in charge of recording the cash receipts and doing the bank reconciliations. This way one single person can’t take the money from the customer, embezzle it, and cover up the thief with fraudulent bookkeeping. If two people perform these jobs, the only way fraud will be able to work is if each person is in collusion with the other. Obviously, two colluding employees are far less likely than a single employee stealing. This is just one example of how the segregation of duties principle can be applied to a company’s internal controls procedures.
Internal Control and Cash Study Objectives
Chapter OutlineStudy Objective 1 - Identify the Principles of Internal Control Internal control consists of all of the related methods and measures adopted within a business to:
Sarbanes-Oxley Act of 2002 (SOX) requires all publicly traded U.S. corporations to maintain an adequate system of internal controls. SOX imposes more responsibilities on corporate executives and boards of directors to ensure that companies’ internal controls are reliable and effective
To safeguard assets and enhance the accuracy and reliability of its accounting records, companies follow internal control principles. The following six internal control principles apply to most enterprises :
Limitations of Internal Control
Would you expect a very small company to have as sophisticated a system of internal control as that of a much larger company? Why not? What are ways in which a small company can have effective internal control procedures? Study Objective 2 - Explain the Applications of Internal Control to Cash Receipts
Study Objective 3 - Explain the Applications of Internal Control to Cash Disbursements
Study Objective 4 - Prepare a Bank Reconciliation The bank and the company maintain independent records of the checking account. The two balances are seldom the same because of:
Study Objective 5 - Explain the Reporting of Cash
Study Objective 6 - Discuss the Basic Principles of Cash Management Many companies struggle, not because they fail to generate sales, but because they cannot manage their cash. Managing the often-precarious balance created by the ebb and flow of cash during the operating cycle is one of a company’s greatest challenges.
Study Objective 7 - Identify the Primary Elements of a Cash Budget Cash is vital and planning the company's cash needs is a key business activity. The cash budget shows the anticipated cash flows, over a one- to two-year period. The cash budget contains the following three sections:
Data in the cash budget must be prepared in sequence because the ending cash balance of one period becomes the beginning cash balance for the next period. Data for preparing the cash budget are obtained from other budgets and from information provided by management. A cash budget contributes to more effective cash management.
What is establishment of responsibility?1. Establishment of Responsibility: An essential characteristic of internal control is. the assignment of responsibility to specific individuals. a. Control is most effective when only one person is responsible for a given task.
Which of the following is a good internal control over cash?The answer is b) Make sure that all cash payments are made by check (with the exception of petty cash).
Which internal control is demonstrated by assigning different individuals?Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping.
Which of the statements below describes the internal control principle of applying?Which of the statements below describes the internal control principle of applying technological controls? Technological controls, such as time clocks and cash registers, improve the effectiveness of controls.
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