CORRESPONDENCE LEARNING MODULE

ETHC 1023 (Governance, Business Ethics, Risk Management and Internal Control)
2nd Semester Academic Year 2020-2021

Week 17 – INTERNAL CONTROL AFFECTING ASSETS

Topics: Internal Control over -
a) Cash Transactions
b) Financial Investments
c) Receivables
d) Inventories and Cost of Goods Sold
e) Property, Plant and Equipment

Learning Outcomes: At the end of this module, you are expected to:

1) Describe the internal control over the major components of assets of a

Business enterprise as stated above.
2) Understand the potential misstatements of the asset accounts and how
weakness in internal control increases the risks of misstatements

Hi guys. May this week be full of hope for a COVID-free world, enlightenment, commitment to our
Christian faith and blessings, physically, mentally and spiritually.

LEARNING CONTENT:
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INTERNAL CONTROL OVER CASH

Finance and accounting department of a business, ideally, should be integrated in a manner as to provide
assurance that:

 All cash that should have been received was in fact

received, recorded accurately and deposited promptly.
 Cash disbursements have been made for authorized
purposes only and have been properly recorded.
 Cash balance are maintained at adequate but not
excessive levels by forecasting expected cash receipts and
payments related to normal operations.

General guidelines to Internal Control over Cash:

1. Do not permit any one employee to handle a transaction from beginning to end.
2. Separate cash handling to record keeping.
3. Centralize receiving of cash to the extent practical,
4. Record cash receipts on a timely basis.
5. Encourage customers to obtain receipts and observe cash register totals.
6. Deposit cash receipts daily.
7. Make all disbursements by check or electronic fund transfer, with the exception of small expenditures
from petty cash.
8. Perform a monthly bank reconciliation prepared by employees not responsible for the issuance of
checks or custody of cash. The completed reconciliation should be reviewed promptly by an
appropriate official.
9. Monitor cash receipts and disbursements by comparing recorded amounts to estimated amounts and
investigating the variances from the estimates.
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INTERNAL CONTROL OVER FINANCIAL INVESTMENTS

Common examples of financial Key terms related to financial investments

investments:
 Interest > is the fee you get by loaning your money
 Bonds
 Stocks  Dividends > based on income or earning success of a company,
 Mutual funds are cash payments that are paid pit of a financial investment
 Certificates of deposit
 Appreciation > the amount a financial investment grows in value
over time

The major elements of adequate internal control over financial investments:

1. Formal investment policies that limit the nature of investments in securities and financial instruments.

2. An investment committee of the board of directors that authorizes and reviews financial investment
activities for compliance with investment policies.

In addition, the company must observe the following key control

procedures:
Other important notes:

Segregation of functions of custody and record-

keeping can be achieved by use of:

 an independent safekeeping agent like a

bank or trust company with no direct contact with
the employee responsible for maintaining the
accounting record of investments.

 Bank security deposit box in the name of

the company and under joint control, meaning
two custodians may have access to the
documents at all times.

INTERNAL CONTROL OVER RECEIVABLES

Notes Receivable > is used for handling transactions of substantial amount widely used by the banks and other
Financial institutions.

Control Environment of Accounts Receivable and Income

o Because of the risk of intentional misstatement, the control environment is very important to
effective internal control over revenue and receivables

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 o Another important factor is an independent audit committee of the BOD that monitors judgments
about revenue recognition principle and estimates
o Management should establish a “tone at the top” of the organization that encourages integrity
and ethical financial reporting, communicated and observed all throughout the organization.
o Provide incentives for dishonest reporting, with emphasis on meeting unrealistic sales and
revenue targets should be eliminated.

Internal Control over Notes Receivables (separation of functions is key)

1. The custodian on notes receivable must not have access to cash or to general accounting records.

2. The acceptance and renewal of notes be authorized in writing by a responsible official who does not
have custody of the notes.

3. The write-off of defaulted notes be approved in writing by responsible officials and effective procedures
adopted for subsequent follow-up of such defaulted notes.

INTERNAL CONTROL OVER INVENTORIES AND COST OF GOODS SOLD

o The control that assure fair valuation of inventories are found in the purchases or acquisition cycle.

o The control includes procedures for selecting vendors, ordering merchandise, inspecting goods
received, recording liability to the vendor and authorizing and making cash disbursements.

o In a manufacturing business, valuation of inventories is affected by production cycle, in which various

manufacturing costs are assigned to inventories, and the cost of inventories is then transferred to the
cost of goods sold.

The term inventories include:

 Goods on hand already for sale in a trading business, or finished goods for a manufacturer

 Goods in-process of production

 Goods to be consumed directly or indirectly in production; raw materials, purchased parts and supplies

Notes:

In most companies, management stresses control over cash and securities but pays little attention to control of
inventories.

Many types of inventories are not susceptible to theft, management may consider controls to be unnecessary.

Such thinking ignores the fact that nearly all the functions involved in producing and disposing company’s
products, hence control for inventories and cost of goods sold is equally important.

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INTERNAL CONTROL OVER PROPERTY, PLANT AND EQUIPMENT

END OF LESSON

References:
1. Corporate Governance, Business Ethics, Risk Management and Internal Control
By: Ma. Elenita Balatbat Cabrera and Gilbert Anthony B
2. Code of Ethics for Professionals
3. www.books.google.com.ph

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PARTICIPATION (for recitation purposes)

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