Universidad CuauhtémocCampus Aguascalientes

Análisis de CostosMaestría en Administración

INTERNAL CONTROLSINTERNAL CONTROLS

Internal Controls

Contents

1 Issues you would face

2

Objectives & Elements3

Real World4

Internal Control Concept

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?

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.

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

Internal Control ElementsInternal Controls

Control EnvironmentM

anag

emen

t

Risk Assessment

Control Procedures

Monitoring

Information & Communication

1. Control environment2. Risk assessment3. Control procedures4. Monitoring5. Information and communication

Elements of Internal ControlInternal Controls

Management philosophy and operating style influences the

control environment.

Management philosophy and operating style influences the

control environment.

Internal Controls

Control Environment

Internal Controls

1. Control environment2. Risk assessment3. Control procedures4. Monitoring5. Information and communication

Elements of Internal Control

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.

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

Internal Controls

1. Control environment2. Risk assessment3. Control procedures4. Monitoring5. Information and communication

Elements of Internal Control

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

Process

Accounting

Operations Custody of Assets

Receiving SuppliesPurchasing of Supplies

Paying Supplies

Segregation of DutiesInternal Controls

Independent check

Independent check

Independent check

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:Otherwise, the following abuses are possible:

Internal Controls

Segregation of Duties

1. Control environment2. Risk assessment3. Control procedures4. Monitoring5. Information and communication

Elements of Internal ControlInternal Controls

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

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 WORLDInternal Controls

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 WORLDInternal 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.

Universidad CuauhtémocCampus Aguascalientes

Análisis de CostosMaestría en Administración