internal control vocab acc ch. 6

Establish Responsibilities: Responsibility for a task should be clearly established and assigned to one person. When a problem occurs in a company where responsibility is not established, determining who is at fault is difficult. 

Maintain Adequate Records: Good recordkeeping helps protect assets and helps managers monitor company activities. When there are detailed records of equipment, for example, items are unlikely to be lost or stolen without detection. Ex: Preprinted forms 

Insure Assets and Bond Key Employees: Assets should be insured against losses, and employees handling lots of cash and easily transferable assets should be bonded. An employee is bonded when a company purchases an insurance policy, or a bond, against theft by that employee. 

Separate Recordkeeping from Custody of Assets: A person who controls or has access to an asset must not have access to that asset’s accounting records. This principle reduces the risk of theft or waste of an asset because the person with control over it knows that another person keeps its records. Also, a recordkeeper who does not have access to the asset has no reason to falsify records. This means that to steal an asset and hide the theft from the records, two or more people must collude—or agree in secret to commit the fraud.

Divide Responsibility for Related Transactions: Responsibility for a transaction should be divided between two or more individuals or departments (does not mean duplication of work). Ex: One employee submits a request to purchase inventory, a second employee approves the request, a third employee makes the ­payment, and a fourth employee records the transaction.

Apply Technological Controls: A cash register with a locked-in tape or electronic file makes a record of each cash sale. A time clock records the exact hours worked by an employee. ID scanners limit access to authorized individuals.

Perform Regular and Independent Reviews: Regular reviews of internal controls to help ensure that procedures are followed. These reviews are preferably done by auditors not directly involved in the activities. Auditors evaluate the efficiency and effectiveness of internal controls.

• Establish Responsibilities:

  • If two bank tellers share the same cash drawer and cash goes missing, neither of them can be held accountable. This is why bank tellers must have separate cash drawers.

• Maintain Adequate Records:

  • A construction company uses prenumbered purchase order forms for any new material orders so that if a purchase order is lost, the company can trace it back to a specific order number and employee.

• Insure Assets and Bond Key Employees:

  • A bank purchases an insurance policy against theft by their tellers both to discourage cash and because the tellers handle cash.

• Separate Recordkeeping from Custody of Assets:

  • A cashier in a retail store handles cash transactions while a separate accounting department maintains sales records and reconciled cash register totals.

• Divide Responsibility for Related Transactions:

  • Splitting up tasks among several employees, for example, one employee initiates a purchase order and a different employee approves the purchase order.

• Apply Technological Control:

  • Employees use a time clock to clock in and out of work, ensuring that their exact hours are recorded.

• Perform Regular and Independent Reviews

  • A has auditors perform periodic and unannounced checks on the company’s departments to ensure that they are following internal controls.