1. Objectives of Internal Controls Protect the firm’s assets Ensure reliability of accounting records Promote operating efficiency Ensure adherence with management’s policies

2. Principles of internal controls Establish responsibility –One person responsible for a task, such as using a particular cash register Limit access to assets by requiring management’s authorization –Manager has key to open cash drawer if clerk makes error

3. Principles of internal controls Require authorization for certain transactions –Any loans over $100,000 approved by board of directors Separation of duties –Person responsible for accounting for assets should not have access to the assets Difficult in a small business –Dentist, oil company

4. Principles of internal controls Documentation procedures –Transactions should be recorded when they occur Taco Bell: call1.800 –Documents should be pre-numbered 50/50 raffles –Six for $5 –All documents should be accounted for

5. Principles of internal controls Physical controls –Safes Best safe is in the bank Night deposit Mechanical and electronic controls –Alarms, television monitors, etc.

6. Principles of internal controls Independent verification –Reconciling bank account; inventory count –No advance notice –Any discrepancies reported to management

7. Principles of internal controls Sound personnel procedures –Need honest employees!!! –Mandatory vacations –Job rotation –Bond employees

8. Limitations of internal controls Difficult to separate duties in a small business Often can’t prevent collusion –Flintstone Cost of internal controls should not exceed benefit

9. Internal controls for cash Payments in the mail –Electronic payments Over the counter –Customer sees amount recorded –Cash in register verified by second person Employees responsible for over/short

10. Internal controls for cash Purchases –Must have authorization of payments Purchase order Report of receipt of goods –Fictional companies

11. Internal controls for cash Bank reconciliation Balance per checkbook + Interest income - Bank service charges - NSF checks Creates A/R. Bank charges depositor for NSF checks. Debit cards. + - Errors in cash journal = Adjusted balance Must make journal entries for above items

12. Internal controls for cash Bank reconciliation Balance per bank + Deposits in transit - Outstanding checks + - Errors made by bank = Adjusted balance

13. Cash management Collect funds quickly –Electronic drafts of customer accounts Minimize inventory –Just in time Pay as late as possible –Electronic payments Cash budgets –Know when you be short of cash and when you will have surplus cash