internal control with questions

### Concise Notes on Internal Control

#### 1. Introduction to Internal Control

- Purpose: Protect assets, prevent fraud, ensure operational efficiency.

- Types:

- Administrative Controls: Efficient office practices (e.g., duty separation).

- Accounting Controls: Protect assets via accounting procedures (e.g., invoice verification).

#### 2. Principles of Internal Control

- Ensure reliable accounting information.

- Safeguard resources against fraud/wastage.

- Compliance with laws/policies.

#### 3. Limitations of Internal Control

- Collusion: Employees bypass controls by working together.

- Human Error: Mistakes render controls ineffective.

- Costs: Expensive implementation.

- Low Staff Numbers: Difficulty segregating duties.

- Requires Review: Must be regularly updated.

---

#### 4. Internal Control Areas

Cash

- Purpose: Safeguard cash from theft/loss.

- Strategies:

- Separate cash handling & recording.

- Bank daily to minimize on-site cash.

- Use cheques/bank transfers for payments.

- Clear cash registers regularly.

Accounts Payable (Creditors)

- Purpose: Ensure proper creditor payments & maintain supplier relationships.

- Strategies:

- Match invoices to purchase orders/delivery notes.

- Separate cash handling from creditor recording.

- Senior approval for payments.

Accounts Receivable (Debtors)

- Purpose: Ensure reliable debtors & efficient debt collection.

- Strategies:

- Send monthly statements to debtors.

- Conduct credit checks & impose credit limits.

- Separate cash handling from debtor recording.

- Review overdue accounts & follow up.

Inventory

- Purpose: Safeguard & manage inventory efficiently.

- Strategies:

- Security (cameras, guards).

- Automated stock reordering.

- Minimize wastage & prioritize old stock sales.

Non-Current Assets

- Purpose: Safeguard & use assets efficiently.

- Strategies:

- Security (cameras, guards).

- Record-keeping & maintenance schedules.

- Approval processes for purchases.

---

#### 5. Examples

- Separation of Duties: Cash handler ≠ cash recorder.

- Daily Banking: Reduces theft risk.

- Credit Checks: Assess debtor reliability.

---

### Practice Test Questions

1. Multiple Choice

Which internal control strategy prevents an employee from stealing cash and falsifying records?

A) Daily banking

B) Separation of duties

C) Credit checks

Answer: B

2. True/False

Collusion is not a limitation of internal control because employees rarely work together.

Answer: False

3. Short Answer

State two strategies to control accounts receivable.

Answer: Credit checks, sending monthly statements.

4. Scenario

A business has frequent inventory theft. Suggest two internal controls to address this.

Answer: Install security cameras, restrict warehouse access.

5. Matching

Match the control to its area:

1. Automated stock reordering

2. Senior approval for write-offs

3. Invoice verification

A) Inventory

B) Accounts Receivable

C) Accounts Payable

Answer: 1-A, 2-B, 3-C

6. Explain

Why is separating duties a key principle of internal control?

Answer: Prevents one person from controlling all aspects of a transaction, reducing fraud risk.

7. Case Study

A small business with 5 employees struggles to segregate duties. What limitation does this illustrate?

Answer: Low staff numbers.

8. List

Name three limitations of internal control.

Answer: Collusion, human error, costs.

9. Application

How does daily banking of cash receipts improve internal control?

Answer: Reduces on-site cash, lowering theft risk.

10. Critical Thinking

Why might a business avoid implementing all possible internal controls?

Answer: High costs or operational inefficiency.