2. Internal Control Chapter 12

3. Internal Control What Is Internal Control?What Is Internal Control? What Are the Major Objectives of Internal Control?What Are the Major Objectives of Internal Control? What Are the Differences Between Accounting and Administrative Controls?What Are the Differences Between Accounting and Administrative Controls?

4. Internal Control What Are the Characteristics or Principles of Internal Control?What Are the Characteristics or Principles of Internal Control? How Are Internal Controls Documented?How Are Internal Controls Documented?

5. Internal Control How Is Flowcharting Useful in Documenting and Monitoring Internal Control?How Is Flowcharting Useful in Documenting and Monitoring Internal Control? How Does the Segregation of Duties Enhance Internal Control?How Does the Segregation of Duties Enhance Internal Control? What Methods of Internal Control Are Necessary to Safeguard Cash?What Methods of Internal Control Are Necessary to Safeguard Cash?

6. Conditions For Fraud and Embezzlement NeedNeed OpportunityOpportunity Failure of ConscienceFailure of Conscience

7. The Industry’s Vulnerability Cash BusinessCash Business Many TransactionsMany Transactions Low Skill EmployeesLow Skill Employees Perception of Industry As Low Social StatusPerception of Industry As Low Social Status

8. The Industry’s Vulnerability Items Used Have “Street Value”Items Used Have “Street Value” Items Used Are Used by General PopulationItems Used Are Used by General Population

9. AICPA Objectives of Internal Control Safeguard AssetsSafeguard Assets Check Accuracy and Reliability of Accounting DataCheck Accuracy and Reliability of Accounting Data Promote Operational EfficiencyPromote Operational Efficiency Encourage Adherence to Prescribed Managerial PoliciesEncourage Adherence to Prescribed Managerial Policies

10. Types of Internal Control Administrative - How the Company OperatesAdministrative - How the Company Operates Accounting - Impact on Financial StatementsAccounting - Impact on Financial Statements

11. Internal Control Basics System Requires - Methods and Procedures; and Reliable Forms/reportsSystem Requires - Methods and Procedures; and Reliable Forms/reports Larger the Company - More Internal Control RequiredLarger the Company - More Internal Control Required

12. Internal Accounting Control Develop Long-Term Audit ProgramDevelop Long-Term Audit Program Set Audit PoliciesSet Audit Policies Conduct Financial AuditsConduct Financial Audits Recommend ImprovementsRecommend Improvements Check Management for ComplianceCheck Management for Compliance Review Operational ControlsReview Operational Controls

13. Internal Accounting Control Monitor Corrective Actions TakenMonitor Corrective Actions Taken Conduct Special Examinations of “Sensitive” AreasConduct Special Examinations of “Sensitive” Areas Investigate FraudInvestigate Fraud Assist the Audit CommitteeAssist the Audit Committee Coordinate With Independent CPA FirmCoordinate With Independent CPA Firm

14. Classification of Controls Preventive Controls Controls That Are Implemented Before a Problem Occurs Such As: Use of Locks or Segregation of DutiesControls That Are Implemented Before a Problem Occurs Such As: Use of Locks or Segregation of Duties

15. Classification of Controls Detective Controls Controls Designed to Discover Problems and to Monitor Preventive Controls Such As External Audits or Surprise Cash AuditsControls Designed to Discover Problems and to Monitor Preventive Controls Such As External Audits or Surprise Cash Audits

16. Characteristics of Internal Control Management LeadershipManagement Leadership Organizational StructureOrganizational Structure Sound PracticesSound Practices Fixed ResponsibilityFixed Responsibility

17. Characteristics of Internal Control Limited AccessLimited Access Competent and Trustworthy PersonnelCompetent and Trustworthy Personnel Segregation of DutiesSegregation of Duties Authorization ProceduresAuthorization Procedures

18. Characteristics of Internal Control Adequate RecordsAdequate Records Procedure ManualsProcedure Manuals Physical ControlsPhysical Controls Budgets and Internal ReportsBudgets and Internal Reports Independent Performance ChecksIndependent Performance Checks

19. Documenting Internal Control FlowchartingFlowcharting Internal Control QuestionnaireInternal Control Questionnaire NarrativeNarrative

20. Code of Ethics Many Hospitality Companies Have Adopted Code of EthicsMany Hospitality Companies Have Adopted Code of Ethics General Managers and Department Heads are Responsible for Advising Employees Under Their Supervision of the Parts of the Code That Apply to Them and Their DutiesGeneral Managers and Department Heads are Responsible for Advising Employees Under Their Supervision of the Parts of the Code That Apply to Them and Their Duties

21. Most Frequent Elements in Codes of Ethics Privacy of CommunicationPrivacy of Communication Conflict of InterestConflict of Interest Political Contributions in the U.S.Political Contributions in the U.S. Company RecordsCompany Records Gifts, Favors, Entertainment, Trips and OutingsGifts, Favors, Entertainment, Trips and Outings

22. Most Frequent Elements in Codes of Ethics Use of Company AssetsUse of Company Assets Anti-Trust LawsAnti-Trust Laws Relations With CompetitorsRelations With Competitors Relations With SuppliersRelations With Suppliers Relationships With CustomersRelationships With Customers

23. Examples of Internal Control CashCash –Bank accounts reconciled monthly –Reconciliation done by independent party –General Cashier needs to take a vacation 1 - 2 times a year –Surprise cash counts –Checks received should be endorsed

24. Examples of Internal Controls Accounts ReceivableAccounts Receivable –Same person collects money does not record payment –Mgmt authorizes and write-offs or adjustments Accounts PayableAccounts Payable –Need invoice to pay –Invoices need to match to PO –Vendor must in system

25. Examples of Internal Controls PurchasingPurchasing –PO system needs to be used –Separate duties for Ordering and Receiving PayrollPayroll –Spvr or Mgr need to approve time sheets –Payroll separate from HR –Undelivered checks returned to CFO

26. Examples of Internal Controls InventoriesInventories –Keep valuables locked away –Keep minimal level on hand –Take a physical inventory periodically Use 2 or more staff to do inventoryUse 2 or more staff to do inventory Fixed AssetsFixed Assets –Annual inventory –Proper approvals prior to purchase or disposal