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Week 8 Course Material For Corporate Governance
Week 8 Course Material For Corporate Governance
Week 8 Course Material For Corporate Governance
No. of Units: 3
She completed her Masters in Business Administration at Baliuag University in 2017. Until
recently, she is the Internal Auditor for Bela Star Distribution Systems Inc., one of the leading
commodities trading companies in North Central Luzon.
SM Baliwag Complex, Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
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Contact Information:
Facebook Account: FIDELIZ ARCA VIDAL
Email Address: fcvidal@nu-baliwag.edu.ph
Contact Number: 0917-125-7539 (globe)
Topics:
Control Procedures
1. Physical Controls
2. Authorization and Approval Limits
3. Segregation of Incompatible Duties
4. Management Controls
5. Arithmetic and Accounting Controls
6. Human Resources Controls
DISLAIMER: The information content provided in this course material is designed to provide
helpful information on the subjects discussed. Some information’s are compiled from different
materials and summarized from different books. Some information’s are based on contributors'
perspective and understanding. References are provided for informational purposes only and do
not constitute endorsement of websites or other sources. Readers should be aware that the
websites/electronic references listed in this course material may change. Hence, the contributors do
not claim any information presented in the materials and do not reflect their own work.
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MODULE 7:
INTERNAL CONTROL & CONTROL PROCEDURES
I. Activity:
III. Content:
INTERNAL CONTROL. The process designed and effected by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement of the
entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations and compliance with applicable laws and regulations.
INTERNAL CONTROL SYSTEM means all the policies and procedures (internal controls) adopted
by the management of an entity to assist in achieving management's objective of ensuring, as far as
practicable, the orderly and efficient conduct of its business, including adherence to management
policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy
and completeness of the accounting records, and the timely preparation of reliable financial
information.
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ELEMENTS OF INTERNAL CONTROL
Factors Affecting Internal controls
Size of business
Nature of business
Nature of operations
Geographical dispersion of its activities
Objectives of the organization
A. CONTROL ENVIRONMENT
- the overall attitude, awareness and actions of directors and management regarding the
internal control system and its importance in the entity.
- The control environment has an effect on the effectiveness of the specific control
procedures.
o Illustration:
However, a strong environment does not, by itself, ensure the effectiveness of the
internal control system.
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3. Participation by those Charged with Governance
4. Management’s Philosophy and Operating Style
5. Organizational Structure
6. Assignment of Authority and Responsibility
7. Human Resources Policies and Procedures
Risk Assessment. The identification, analysis and management of risks pertaining to the
preparation of financial statements.
1. Initiate, record, process, and report entity transactions and to maintain accountability for
related assets, liability and equity
2. Resolve incorrect processing of transactions
(Example: automated suspense files and procedures followed to clear suspense items
out on a timely basis)
3. Process and account for system overrides or bypasses to controls.
4. Transfer information from transaction processing systems to general ledger.
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5. Capture information relevant to financial reporting for events and conditions other than
transactions
(Example: depreciation, amortization and changes in recoverability of accounts
receivables)
6. Ensure information required to be disclosed by the applicable financial reporting
framework is accumulated, recorded, processed, summarized and appropriately reported
in the financial statements.
Journal Entries
- To record sales, purchases, and cash disbursements in the general ledger
- To record accounting estimates that are periodically made by management
- To record non-recurring, unusual transactions or adjustments
Examples:
Policy manuals, accounting and financial reporting manuals and memoranda.
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D. CONTROL ACTIVITIES
- the policies and procedures that help ensure that management directives are
carried out, for example, that necessary actions are taken to address risks that
threaten the achievement of the entity's objectives. Control activities, whether
within IT or manual systems, have various objectives and are applied at various
organizational and functional levels.
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o General IT-controls are policies and procedures that
relate to many applications and support the effective
functioning of application controls by helping to
ensure the continued proper operation of information
system.
3. Physical controls
a. The physical security of assets, including adequate safeguards such as
secured facilities over access to assets and records
b. The authorization for access to computer programs and data files.
c. The periodic counting and comparison with amounts shown on control
records
E. MONITORING OF CONTROLS
- The process that an entity uses to assess the quality of internal control over time.
- Involves assessing the design and operation of controls on a timely basis and
taking corrective action as necessary
V. Evaluation
1. The basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived is known as
a. Management by exception.
b. Management responsibility.
c. Limited liability.
d. Reasonable assurance.
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2. Of the following control environment characteristics, identify the one that contributes most
to effective internal control
a. The audit committee consists of the president, two vice- presidents, and the corporate
controller.
b. The company does not have a centralized human resources function.
c. The company has an effective internal audit staff that monitors controls on a
continuous basis.
d. The company routinely transacts business with related parties.
3. It would be appropriate for the payroll accounting department to be responsible for which of
the following functions?
a. Approval of employee time records.
b. Maintenance of records of employment, discharges, and pay increases.
c. Preparation of periodic governmental reports as to employees' earnings and
withholding taxes.
d. Temporary retention of unclaimed employee paychecks.
4. The most effective control to prevent unbilled and unrecorded shipments of finished goods
is to
a. Require all outgoing shipments to be accompanied by a prenumbered shipping order
and bill of lading (signed by the carrier). Forward a copy of these documents to
accounting, to be placed in an open file awaiting receipt of the customer invoice
copy.
b. Forward a copy of the shipping order and bill of lading to billing.
c. Implement a policy that prevents sales invoices from being mailed to customers in
the absence of a properly approved shipping order and bill of lading signed by the
carrier.
d. Forward a copy a the signed bill of lading to the stores manager.
5. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control procedures over the invoicing function allow goods to be shipped that are
not invoiced. The inadequate controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.
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c. Cashier
d. Controller
8. Controls that enhance the reliability of the financial statements may be classified as
prevention controls and detection controls. Which of the following is primarily a detection
control?
a. Separation of duties between recording cash receipts and depositing cash.
b. Bank accounts are reconciled monthly by persons independent of cash recording and
cash custody.
c. The human resources department authorizes the hiring of only those persons for
accounting positions that meet the written job requirements specified by the
corporate controller.
d. An accounting manual, accompanied by a detailed chart of accounts, carefully and
clearly describes each type of transaction affecting the entity.
9. Internal control procedures are strengthened when the quantity of merchandise ordered is
omitted from the copy of the purchase order sent to the
a. Department that initiated the requisition
b. Receiving department
c. Purchasing agent
d. Accounts payable department
10. In a properly designed set of internal control procedures, the same employee should not be
permitted to
a. Sign checks and cancel supporting documents.
b. Receive merchandise and prepare a receiving report.
c. Prepare disbursement vouchers and sign checks.
d. Initiate a request to order merchandise and approve merchandise received.
VI. References
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