3. Internal Controls
Issues you would Face
Some of the issues you would
face as a manager in controlling
the operation of a business are:
Service or product must be provided on time.
Quality must meet customer expectations.
Employees must provide work for the hours they are
paid.
Work equipment should be used for business purposes
only.
Vehicles should be used for business purposes only.
Customers must be billed and bills collected for services
redered.
How would you adress some of these issues?
4. Internal Controls
Concept
Internal Controls are the policies
and procedures that protect assets
from misuse, ensures that business
information is accurate, and ensures
that laws and regulations are being
followed.
Business use internal controls to guide their
operations and prevent abuses of their
systems.
5. Internal Control Objectives
Assets
Safeguard
Accurate
Information
Laws &
Regulations
Compliance
Control
Environment
Internal Controls
Assets are safeguard and used
for business purposes only
Employees comply with laws
and regulations.
Business information is
accurate
Risk
Assessment
Control
Procedures
Monitoring
Information &
Communication
6. Internal Control Elements
Internal Controls
Control Environment
Risk Assessment
Control Procedures
Monitoring
Information & Communication
7. 1. Control environment
2. Risk assessment
3. Control procedures
4. Monitoring
5. Information and communication
Elements of Internal Control
Internal Controls
9. Internal Controls
1. Control environment
2. Risk assessment
3. Control procedures
4. Monitoring
5. Information and communication
Elements of Internal Control
10. 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.
Internal Controls
Risk Assessment
11. Internal Controls
1. Control environment
2. Risk assessment
3. Control procedures
4. Monitoring
5. Information and communication
Elements of Internal Control
12. Internal Controls
Competent Personnel
Rotating Duties
Mandatory Vacations
Separating Responsibilities for
Related Operations, Custody
of Assets, and Accounting
(Segregation of Duties)
Proofs and Security Measures
Control Procedures
13. Process
Accounting
Operations Custody of Assets
Receiving SuppliesPurchasing of Supplies
Paying Supplies
Segregation of Duties
Internal Controls
Independent
check
Independent
check
Independent
check
14. 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.
Otherwise, the following abuses are possible:
Internal Controls
Segregation of Duties
15. 1. Control environment
2. Risk assessment
3. Control procedures
4. Monitoring
5. Information and communication
Elements of Internal Control
Internal Controls
16. Warning Signs
1. Abrupt change in lifestyle (without
winning the lottery).
2. Close social relationship with
suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other
employees.
5. Excessive use of alcohol or drugs.
1. Missing documents or gaps in transaction
numbers (Could mean documents are being
used for fraudulent transactions).
2. An unusual increase in customer refunds
(refunds may be phony)
3. Differences between daily cash receipts and
bank deposits (could mean receipts are
pocketed before being deposited).
4. Suden increase in slow payments (employee
may be pocketing the payment).
5. Backlog in recording transactions (possibly
an attempt to delay detection of fraud).
1 2
Internal Controls
17. An accounting clerk for the Grant
County (Washington) Alcoholism
Program was in charge of collecting
money, making deposits, and
keeping the records. While the clerk
was away on maternity leave, the
replacement clerk discovered a
fraud: $17,800 in fees had been
collected but had been hidden for
personal gain.
A 1996 survey by KPMG, an
international accounting firm,
identified expense accounts
manipulation, receiving
payments from suppliers for
favorable purchase treatment
(kickbacks), purchase for
personal use, and
misappropriation of cash as the
most typical methods of
employee fraud. Based on a
1995 survey by Association of
Fraud Examiners, annual fraud
losses are estimated to be $400
billion in the United States,
which for the average
organization would be 6% of
revenues or $9 per day per
employee.
REAL WORLD
Internal Controls
18. An employee of J.C Penney
Co. was convicted of taking
$1 million in bribes and
kickbacks from suppliers in
exchange for information
about competitors´ bids.
One of the prosecuting
attorneys told the court.
“This case will be
discussed in corporate
boardrooms… The message
ought to be sent out that
there´s a consequence to
corporate fraud.”
REAL WORLD
Internal Controls
In one of the largest frauds ever
committed against a university,
a former financial aid officer for
New York University, was
charged with stealing $4.1M
from the state of New York. The
aid officer allegedly falsified
over a thousand tuition
assistance checks to students
who were not entitled to receive
aid and who did not know about
the checks. The aid officer
deposited the bogus checks for
personal use. The initial
evidence of the fraud was the
officer spending $780K on
expensive jewelry.
Develop a schedule at the beginning of each day and then inspect the work at the end of the day to verify that it was completed according to quality standards.
Surprise inspections by arrival at site on random times to verify that the team is working according to schedule.
You can ask employees to clock in and clock out at the beginning and ending of work.
You can ask to return vehicles and equipment at the end of the day to a central location to prevent unathorized use.
You can keep a log of odometer readings.
You can bill customers after you have inspected the work.