Accounting 1 Dersi 7. Ünite Özet

Introduction

Internal control is a managerial task and responsibility to ensure that all of the activities of a company are under the management control.

Internal Control

The objective of internal control is to provide reasonable assurance that assets are safeguarded and used for business purposes, business information is accurate, and employees comply with laws and regulations. In this context, internal control can be defined as a plan and a system of control procedures designed and implemented by the management and the board of directors.

An internal control should design and implement to achieve some objectives:

Operations objectives: These objective state the efficiency and effectiveness of the business’ activities.

Reporting objectives: These objectives are about the reliability of financial, non-financial and all other types of reports.

Compliance objectives: These objectives related to complying with laws and regulations that the business is subject to according to the its characteristics.

COSO Framework

The framework that suggested by COSO is useful for board of directors, management, all personnel, and all other related parties. However, this internal control framework has a particular importance and benefit for board of directors and management.

COSO Framework:

• can be applied to all types of business.
• has a principle-based approach and this approach can provide flexibility to the internal control process.
• states how components and related principles are present and functioning and how components operate together.
• states how components and related principles are present and functioning and how components operate together.
• facilitates risk assessment prepares an appropriate response within acceptable level and deals with fraud.
• can be applied not only in financial reporting but also all other types of reporting, operating and compliance objectives.
• can help to eliminate ineffective, redundant, or inefficient controls.

Internal control has five components:

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring Activities

Control Environment: It defines a set of standards, processes, and structures that provide a basis to carry control consciousness across the businesses.

Risk Assessment: It is a process to identify and assess risks to the achievement of objectives. Accordingly, this process forms a basis to determine the way of risk management.

Control Activities: Control activities are some actions based on policies and procedures. The policies and procedures for the actions named control activities, are established to ensure that management directives are carried out.

Information and Communication: To achieve the internal control objectives, relevant and timely information is required. After gathering information, an effective communication will be needed to utilize this information in the business.

Monitoring Activities: Management should monitor the effectiveness and efficiency of internal control continuously. As a result of this monitoring process, some new controls may be designed or some controls may become unnecessary and they may be abolished because the conditions and requirements may change over the time.

Fraud

Fraud is an intentional misrepresentation of facts which is made for purpose of persuading another party to act in a way that causes injury or damage to that party.

Fraud can be classified into two common types according to their impacts on financial statements:

1. Misappropriation of assets
2. Fraudulent financial reporting

Misappropriation of assets: Frauds which are committed by employees to steal money or other assets.

Fraudulent financial reporting: Frauds which are committed by managers to make false and misleading entries in the books.

Fraud Triangle

To determine the best controls, the conditions and factors that may cause fraud risk should be analyzed. The description of the factors that may cause fraud risk are called fraud triangle.

The components of fraud triangle are pressure, opportunity, and rationalization .

Pressure: It is one of the components which is based on the effects of the stress factor on the management and other employees.

Opportunity: It is another component arising from control deficiencies. An ineffective internal control creates an environment which is convenient for some mistakes or fraud.

Rationalization: Sometimes, employees or some managers try to make excuses and convince themselves that fraud is not an extraordinary action; and they try to rationalize their action.

Internal Control Over Cash Receipts and Payments

Control procedures are very critical for cash because of some characteristics of cash. So, it can be said that internal control has a significant importance for cash.

Cash is the most liquid asset of the business which is reported as a current asset on the balance sheet.

Regarding with artificial intelligence , “machine learning” and “deep learning” can provide effective techniques to find some solutions to protect businesses’ cash and other assets against fraud.

A cash budget is a document that shows the expected amount of cash receipt and payments for a period in the future.

Cash is an asset which is the most difficult to safeguard.

A voucher is a formal document which authorizes a cash payment.

There are three parties while drawing a check: A maker, a payee , and a bank.

A petty cash fund is a fund that contains small cash amounts to use for small expenditures.

While setting up a petty cash fund , petty cash account is opened and used in the journal entry.

If there is no change in the total amount of the petty cash fund, the petty cash account is not used in the journal entry while replenishing the petty cash fund periodically.

The Bank Account as A Control Device

By using a bank account, businesses can keep their important amount of cash in a bank instead of keeping on hand. Use of bank accounts reduces the amount of cash on hand at any one time. This is an important way of protecting cash from possible thefts.

Advantages of online banking:

1. Pay Your Bills Online
2. View Your Transactions
3. Transfer Money Between Accounts
4. Mobile Banking
5. Syncing with Your Money Applications

A bank statement is a document which is prepared by a bank to show the transactions that occurred in the account of a business within a month.

A bank reconciliation is a statement that explains any differences between the balance shown on the bank statement and the balance shown on the business’s accounting records.

Reporting Cash and Using Cash Ratio

It is very important to follow the rules for reporting all of the accounts especially for financial statement analysis. For many ways of analysis, the cash amount may be an important amount.

Cash equivalents are highly liquid investments that can be converted into cash in a short term.

Cash ratio is a measure of a company’s ability to pay current liabilities from cash and cash equivalents.