Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University Lesson note Lesson 12 internal controls and business ethics Learning objectives 1. Explain the fundamental principles of internal control 2. Define, explain the purpose, and identify the principles of internal accounting control 3. Apply internal control to cash 4. Explain and record petty cash fund transactions 5.Identify control features 6. Prepare a bank reconciliation. Explain the fundamental principles of internal control Teaching hours Students major in accounting: 4 hours Others. Teaching content China Aviation Oil (Singapore)Corp, an overseas arm of China's main jet-fuel supplier revealed the end of 2004 that it has racked up about $550 million in trading-related losses 2. Define internal control Internal control is the organizational plan and all the related measures that an entity adopts (2) Encourage adherence to company policies (3)Promote operational efficiency, and (4)Ensure accurate and reliable accounting records Management has primary responsibility for the financial statements. Exhibit 7-1 is an excerpt from the Responsibility for Consolidated Financial Statements of Lands'End 3. Identify the characteristics of an efective system of internal control (1 )Competent, reliable, and ethical personnel-Attract top-quality employees, train them well
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Lesson notes Lesson 12: Internal Controls and Business Ethics Learning objectives 1.Explain the fundamental principles of internal control. 2.Define, explain the purpose, and identify the principles of internal accounting control. 3.Apply internal control to cash. 4.Explain and record petty cash fund transactions. 5.Identify control features. 6.Prepare a bank reconciliation7.Explain the fundamental principles of internal control. Teaching hours Students major in accounting: 4 hours Others: 2 hours Teaching contents: 1. Opening story China Aviation Oil (Singapore) Corp., an overseas arm of China's main jet-fuel supplier, revealed the end of 2004 that it has racked up about $550 million in trading-related losses. 2. Define internal control Internal control is the organizational plan and all the related measures that an entity adopts to (1) Safeguard assets, (2) Encourage adherence to company policies, (3) Promote operational efficiency, and (4) Ensure accurate and reliable accounting records. Management has primary responsibility for the financial statements. Exhibit 7-1 is an excerpt from the Responsibility for Consolidated Financial Statements of Lands’ End. ERM 3. Identify the characteristics of an effective system of internal control (1)Competent, reliable, and ethical personnel—Attract top-quality employees, train them well
Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University and supervise them (2)Assignment of responsibilities-Each employee is assigned certain responsibilities(often defined in the organizational chart) (3)Proper authorization-An organization generally has a written set of rules that outlines approved procedures. Tasks that fall outside this set of procedures may be performed only if properly authorized (4)Separation of dutiesDividing responsibilities for transactions limits the chances for fraud and promotes accuracy of the accounting records. Separation of duties may be divided into four parts Separation of operations from accounting-The entire accounting function should be pletely operating departments Separation of custody of assets from accounting-Accountants should not have access to assets, and those that have access to assets(such as the cashier) should not have access to the accounting record Separation of authorization of transactions from the custody of related assets-People who authorize transactions should not handle the related asset Separation of duties within the accounting function-Different people should perform the various phases of accounting to minimize errors and opportunities for fraud (5)Internal and external audits-Internal and external auditors identify weaknesses in internal Internal auditors are employees External auditors are employed by accounting firms that are hired by a business to examine the financial statements (6) Documents and records-Business documents should be prenumbered to call attention to a missing document
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University and supervise them. (2)Assignment of responsibilities—Each employee is assigned certain responsibilities (often defined in the organizational chart). (3)Proper authorization—An organization generally has a written set of rules that outlines approved procedures. Tasks that fall outside this set of procedures may be performed only if properly authorized. (4)Separation of duties—Dividing responsibilities for transactions limits the chances for fraud and promotes accuracy of the accounting records. Separation of duties may be divided into four parts: Separation of operations from accounting—The entire accounting function should be completely separate from operating departments. Separation of custody of assets from accounting—Accountants should not have access to assets, and those that have access to assets (such as the cashier) should not have access to the accounting records. Separation of authorization of transactions from the custody of related assets—People who authorize transactions should not handle the related asset. Separation of duties within the accounting function—Different people should perform the various phases of accounting to minimize errors and opportunities for fraud. (5)Internal and external audits—Internal and external auditors identify weaknesses in internal control. Internal auditors are employees. External auditors are employed by accounting firms that are hired by a business to examine the financial statements. (6)Documents and records—Business documents should be prenumbered to call attention to a missing document
Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University devices and computer controls-Accounting systems are relying on the computer to perform basic functions, and therefore, programmers become the focus for internal controls. Businesses use other electronic devices to help protect assets and control operations Inventory (8 )Other controlsBusinesses often use controls to protect assets such as fireproof vaults(to protect documents), burglar alarms(to protect property ), point-of-sale terminals(to protect cash) Fidelity bonds insure the company against theft by an employee Mandatory vacations and job rotation enhances morale and helps keep employees honest (9)e-Commerce creates some new risks such as protection confidential information 1)Some pitfalls include a Stolen credit-card numbers that can be used by authorized people b Computer viruses(that reproduce themselves) and Trojan horses(that do not reproduce)are vicious programs that can destroy or alter data and/or infect word-procession files c Hackers can impersonate legitimate businesses on the web and solicit confidential data from unsuspecting people 2)Two standard techniques are used to secure e-commerce data. a Encryption rearranges text messages by some mathematical process so that the message cannot be read by anyone who does not know the process b Firewalls limit access to a local network by blocking intruder (10)There are some limitations of internal control procedures D)Internal control systems can be thwarted by collusion between two or more people working together to defraud the firm 2)An overly complex internal control system may be inefficient
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University (7)Electronic devices and computer controls—Accounting systems are relying on the computer to perform basic functions; and therefore, programmers become the focus for internal controls. Businesses use other electronic devices to help protect assets and control operations, such as inventory sensors. (8)Other controls—Businesses often use controls to protect assets such as fireproof vaults (to protect documents), burglar alarms (to protect property), point-of-sale terminals (to protect cash). Fidelity bonds insure the company against theft by an employee. Mandatory vacations and job rotation enhances morale and helps keep employees honest. (9)e-Commerce creates some new risks such as protection confidential information. 1)Some pitfalls include: a.Stolen credit-card numbers that can be used by authorized people. b.Computer viruses (that reproduce themselves) and Trojan horses (that do not reproduce) are vicious programs that can destroy or alter data and/or infect word-procession files. c.Hackers can impersonate legitimate businesses on the web and solicit confidential data from unsuspecting people. 2)Two standard techniques are used to secure e-commerce data. a.Encryption rearranges text messages by some mathematical process so that the message cannot be read by anyone who does not know the process. b.Firewalls limit access to a local network by blocking intruders. (10)There are some limitations of internal control procedures. 1)Internal control systems can be thwarted by collusion between two or more people working together to defraud the firm. 2)An overly complex internal control system may be inefficient
Task Team of FUNdaMENTAL aCCOUNtIng School of Business, Sun Yat-sen University (12)The bank account is a control device because banks have established practices for 1)Banks provide depositors with detailed records of cash transactions. These records include: aA signature card, to ensure that only an authorized person has access to the account b Deposit tickets, to maintain a record of amounts deposited c Checks to maintain a record of monies withdrawn from the bank: includes the date of the check, the name of the payee, and the signature of the maker d Bank statements, to show the monthly activity in an account Canceled checks, checks that have cleared the bank, are usually included in the bank Electronic funds transfer(EFT) are paperless transactions that transfer cash to or from a bank account. The bank statement lists Eft transactions 2)The bank reconciliation explains the differences between the bank statement balance and a Items recorded by the company but not yet recorded by the bank include Deposits in transit-Money that has been deposited by the company but not yet recorded by Outstanding checks-Checks that have been issued by the company but not yet paid by the b Items recorded by the bank but not yet recorded by the company include Bank collections-Money collected by the bank on behalf of its customers. Some companies use a lock-box system where customers make payments directly to the bank to reduce theft EFT-The bank statement may include EFTs that the company has not yet recorded
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University (12)The bank account is a control device because banks have established practices for safeguarding cash. 1)Banks provide depositors with detailed records of cash transactions. These records include: a.A signature card, to ensure that only an authorized person has access to the account. b.Deposit tickets, to maintain a record of amounts deposited. c.Checks, to maintain a record of monies withdrawn from the bank; includes the date of the check, the name of the payee, and the signature of the maker. d.Bank statements, to show the monthly activity in an account. Canceled checks, checks that have cleared the bank, are usually included in the bank statement. Electronic funds transfer (EFT) are paperless transactions that transfer cash to or from a bank account. The bank statement lists EFT transactions. 2)The bank reconciliation explains the differences between the bank statement balance and the general ledger balance of cash. (Exhibit 7-5 illustrates the Cash account.) a.Items recorded by the company but not yet recorded by the bank include: Deposits in transit—Money that has been deposited by the company but not yet recorded by the bank. Outstanding checks—Checks that have been issued by the company but not yet paid by the bank. b.Items recorded by the bank but not yet recorded by the company include: Bank collections—Money collected by the bank on behalf of its customers. Some companies use a lock-box system where customers make payments directly to the bank to reduce theft. EFT—The bank statement may include EFT’s that the company has not yet recorded
Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University Service chargesFees that the bank charges for certain services and are ne nown depositor until the bank statement is received Interest revenue earned on the checking account-The amount of interest earned may not be known until the bank statement is received insufficient funds checks(NSF)-NSF checks received from customers and returned to the payee, they are sometimes included in the bank statement Checks collected, deposited, and returned to payee by the bank for reasons other than NSF-The bank may return checks because the account has closed, the check is too old, the signature is not authorized, the check has been altered, or the check form is improper. Check printing charge-A fee that the bank charges for printing checks c Errors may be made by either the bank or the company 4. Prepare a bank reconciliation and the related journal entries (1)The following adjustments are made to the balance per bank. (Exhibit 7-7 is an example of a bank reconciliation. Balance per bank XX Add: Deposits in transit XX XX Less: Outstanding checks (XX) Adjusted bank balance XX (2)The following adjustments are made to the balance per books Balance per books XX Add EFT receipt XX Bank collection XX Interest reve Less: Service charge XX
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Service charges—Fees that the bank charges for certain services and are not known by the depositor until the bank statement is received. Interest revenue earned on the checking account—The amount of interest earned may not be known until the bank statement is received. Nonsufficient funds checks (NSF)—NSF checks received from customers and returned to the payee; they are sometimes included in the bank statement Checks collected, deposited, and returned to payee by the bank for reasons other than NSF—The bank may return checks because the account has closed, the check is too old, the signature is not authorized, the check has been altered, or the check form is improper. Check printing charge—A fee that the bank charges for printing checks. c.Errors may be made by either the bank or the company. 4. Prepare a bank reconciliation and the related journal entries (1)The following adjustments are made to the balance per bank. (Exhibit 7-7 is an example of a bank reconciliation.) Balance per bank XX Add: Deposits in transit XX XX Less: Outstanding checks (XX) Adjusted bank balance XX (2)The following adjustments are made to the balance per books. Balance per books XX Add: EFT receipt XX Bank collection XX Interest revenue XX XX Less: Service chargeXX