AC 210 Lecture Notes - Lecture 3: Internal Control, Financial Statement
5 Jun 2018
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Internal Control
Internal control is the process designed to ensure reliable financial reporting, effective
and efficient operations, and compliance with applicable laws and regulations.
Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also
part of internal control.
Control environment. The management style and the expectations of upper‐level
managers, particularly their control policies, determine the control environment. An
effective control environment helps ensure that established policies and procedures are
followed. The control environment includes independent oversight provided by a board
of directors and, in publicly held companies, by an audit committee; management's
integrity, ethical values, and philosophy; a defined organizational structure with
competent and trustworthy employees; and the assignment of authority and
responsibility.
Control activities. Control activities are the specific policies and procedures
management uses to achieve its objectives. The most important control activities
involve segregation of duties, proper authorization of transactions and activities,
adequate documents and records, physical control over assets and records, and
independent checks on performance. A short description of each of these control
activities appears below.
• Segregation of duties requires that different individuals be assigned
responsibility for different elements of related activities, particularly those
involving authorization, custody, or recordkeeping. For example, the same
person who is responsible for an asset's recordkeeping should not be
responsible for physical control of that asset Having different individuals perform
these functions creates a system of checks and balances.
• Proper authorization of transactions and activities helps ensure that all
company activities adhere to established guide lines unless responsible
managers authorize another course of action. For example, a fixed price list may
serve as an official authorization of price for a large sales staff. In addition, there
may be a control to allow a sales manager to authorize reason able deviations
from the price list.
• Adequate documents and records provide evidence that financial statements
are accurate. Controls designed to ensure adequate recordkeeping include the
creation of invoices and other documents that are easy to use and sufficiently
informative; the use of prenumbered, consecutive documents; and the timely
preparation of documents.
• Physical control over assets and records helps protect the company's assets.
These control activities may include electronic or mechanical controls (such as a
safe, employee ID cards, fences, cash registers, fireproof files, and locks) or
computer-related controls dealing with access privileges or established backup
and recovery procedures.
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Document Summary
Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations. Safeguarding assets against theft and unauthorized use, acquisition, or disposal is also part of internal control. The management style and the expectations of upper level managers, particularly their control policies, determine the control environment. An effective control environment helps ensure that established policies and procedures are followed. Control activities are the specific policies and procedures management uses to achieve its objectives. The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance. A short description of each of these control activities appears below: segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping.
