Accounting Systems and Internal Controls

Objectives

After studying this chapter, you should be able to.

1. Define an accounting systems 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.
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. 

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 

Control Procedures

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

Otherwise, the following abuses are possible: Related Operations

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, this causing payment for supplies not received or poor-quality supplies.
3. Supplies may be stolen by the employee.
4. The validityand accuracy of invoices may be verified carelessly.

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 vacations.
4. Frequent borrowing from other employees.
5. Excessive use of alcohol or drugs.

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.