Accounting Systems and Internal Controls Chapter 5 Accounting Systems and Internal Controls Accounting, 21st Edition Warren Reeve Fess © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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After studying this chapter, you should be able to: Objectives 1. Define an accounting system and describe its implementation. 2. List the three objectives of internal control, and define and give examples of the five elements of internal control. 3. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. After studying this chapter, you should be able to:

Objectives 4. Describe and give examples of additional subsidiary ledgers and modified special journals. 5. Apply computerized accounting to the revenue and collection cycle. 6. Describe the basic features of e-commerce.

Basic Accounting System

Analysis FEEDBACK Design Implementation

Objectives of Internal Control To provide reasonable assurance that: 1. assets are safeguarded and used for business purposes. 2. business information is accurate. 3. employees comply with laws and regulations.

Elements of Internal Control 1. Control environment 2. Risk assessment 3. Control procedures 4. Monitoring 5. Information and communication

Elements of Internal Control 1. Control environment 2. Risk assessment 3. Control procedures 4. Monitoring 5. Information and communication

Management philosophy and operating style influences the control environment.

Elements of Internal Control 1. Control environment 2. Risk assessment 3. Control procedures 4. Monitoring 5. Information and communication

Once risks are identified, they can be analyzed to estimate their significance, to assess their likelihood of occurring, and to determine actions that will minimize them.

Elements of Internal Control 1. Control environment 2. Risk assessment 3. Control procedures 4. Monitoring 5. Information and communication

Control Procedures Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for Related Operations Separating Operations, Custody of Assets, and Accounting Proofs and Security Measures

Control Procedures Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for Related Operations Separating Operations, Custody of Assets, and Accounting Proofs and Security Measures

Separating Responsibilities for Related Operations Otherwise, the following abuses are possible: 1. Orders may be placed on the basis of friendship with a supplier, rather than on price, quality, and other objective factors. 2. The quantity and quality of supplies received may not be verified, thus causing payment for supplies not received or poor-quality supplies. 3. Supplies may be stolen by the employee. 4. The validity and accuracy of invoices may be verified carelessly.

Control Procedures Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for Related Operations Separating Operations, Custody of Assets, and Accounting Proofs and Security Measures

Custody of Assets Operations Accounting Independent check Independent check Operations Accounting Independent check

Elements of Internal Control 1. Control environment 2. Risk assessment 3. Control procedures 4. Monitoring 5. Information and communication

Clues to Potential Problems Warning signs with regard to people: 1. Abrupt changes in lifestyle. 2. Close social relationships with suppliers. 3. Refusing to take a vacation. 4. Frequent borrowing from other employees. 5. Excessive use of alcohol or drugs.

Clues to Potential Problems Warning signs from the accounting system: 1. Missing documents or gaps in transaction numbers. 2. An unusual increase in customer refunds. 3. Differences between daily cash receipts and bank deposits. 4. Sudden increase in slow payments. 5. Backlog in recording transactions.