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Internal Control Structure:

Policies and procedures used by management to meet its objectives.

Adequate Segregation of Duties:

1. Strategy to provide an internal check on performance through separation of custody of assets from accounting personnel.
2. Even in a small business, three functions should be separated:
     1. authorization (including signing checks)
     2. record keeping (including entering accounting information), and
     3. custody of assets (including blank checks).
3. A company will realize the efficiency of specialization and reduce errors, both intentional and unintentional.

Proper Procedures for Authorization:

1. Originates with the stockholders who elect a board of directors.
2. Delegated to upper-level management and then throughout the firm.
3. Only certain individuals should be authorized to enter data into accounting records and prepare accounting reports.

Adequate Documents and Records:

1. Documents allow management to review transactions for appropriate authorization. (bills attached to checks ready for signature, check stubs stapled to paid invoice)
2. Evidence that the recording and summarizing functions that lead to financial reports are being performed properly. (reports of disbursements and income)
3. A well-designed document is
     1. easily interpreted and understood.
     2. designed with all possible uses in mind.
     3. prenumbered for each identification and tracking.
     4. formatted so it can be handled quickly and efficiently.

Physical Control Over Assets and Records:

1. Physical precautions used to protect assets and records, such as locks on doors, fireproof vaults, password verification, and security guards. (blank checks are securely stored) (all checks are accounted for)
2. The high cost of backup records is justified in protecting them.
3. This reduces opportunities for employees to misappropriate assets.

Independent Checks on Performance:

1. Procedures for continual internal verification of other controls. (owner should receive bank statements and review all checks written) (owner should verify bank reconciliation)
2. Incorporate reviews of functions, as well as internal checks created from a proper segregation of duties.
Types include an outside auditor, mandatory vacations while another employee performs those tasks, periodic rotations of duties, or having someone outside the accounting process reconcile bank statements.


The three basic internal control structure categories are:

     1. the control environment,
     2. the accounting systems, and
     3. the control procedures.


The five types of control procedures are:

     1. segregation of duties,
     2. procedures for authorizations,
     3. documents and records,
     4. physical safeguards, and
     5. independent checks.

The control environment is comprised of such things as:

     management's philosophy and operating style,
     the organization structure, and
     the audit committee.

The Accounting System:

a. To identify, assemble, classify, analyze, record, and report the entity's transactions, and to maintain accountability for assets.

b. Should contain adequate controls to ensure objectives are met.

     Validity
     Authorization
     Completeness
     Classification
     Timeliness
     Valuation
     Posting and summarization

 

     
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