Internal Controls: Application

Study Unit Seven: Controls - Application

• This study unit is the fourth of four covering Governance, Risk Management, and Control from The IIA's CIA Exam Syllabus.
• This domain makes up 35% of Part 1 of the CIA exam and is tested at the basic and proficient cognitive levels.
• The four study units are: Governance, Risk Management, Controls: Types and Frameworks, and Controls: Application.
• The learning objectives of Study Unit 7 are to interpret internal control concepts and types of controls, and examine the effectiveness and efficiency of internal controls.

Flowcharts and Process Mapping

• Flowcharting is a useful auditing tool for both systems development and understanding internal control.
• A flowchart is a pictorial diagram of the definition, analysis, or solution of a problem in which symbols are used to represent operations, data flow, documents, records, etc.
• Process mapping represents a system or process as a diagram called a process map or flowchart.
• Flowcharts depict inputs by machines and/or humans and the outputs that result from those processes.
• Creating and updating process maps aids the auditor's understanding by facilitating discussion with the relevant auditee personnel.
• Process mapping facilitates the identification of strengths and weaknesses in the process in the form of key controls that need to be tested.
• The auditor should conduct a walk-through to confirm that the process actually works in the manner depicted.
• Standard flowchart symbols have been developed for auditors and other professionals.
• Swim lanes can delineate which function or department performs which process.
• The example horizontal flowchart shows the purchasing process starting with the identification of the need for additional inventory and ending with the receipt and recording of the new inventory and recognition of the amount due to the supplier.
• The flowchart is an example of a vertical layout without flows across organizational units.
• A process narrative is a tool that can be used alongside or instead of a flowchart.
• A narrative is a sequential description of the inputs, process steps, and outputs of a process.
• A block diagram is similar to a process map used to depict a process in diagram form and is easier to create and understand because it does not require knowledge of different symbols.

Accounting Cycles and Associated Controls

• A properly designed system of internal controls should reduce the risk of errors and prevent an individual from perpetrating and concealing fraud.
• The organization's structure and the assignment of job duties should be designed to segregate certain functions within this environment.
• Cost-benefit criteria must be considered.
• For any given transaction, Authorization, Recording and Custody should be performed by separate individuals in different parts of the organization.
• The internal control system is designed to detect fraud by one person but not fraud by collusion or management override.
• In a medium-sized or larger organization, adequate segregation of duties can be achieved by separating the responsibilities of corporate-level executives.
• The accounting process can be described in terms of five cycles: sales to customers on credit and recognition of receivables , collection of cash from customer receivables, purchase orders on credit and recognition of payables, payment (disbursement) of cash to satisfy trade payables and payment of employees for work performed and allocation of costs.
• Five flowcharts and accompanying tables depict the steps in the cycles and the controls in each step for an organization large enough to have an optimal segregation of duties.
• Documents originating outside the organization are separated by a thick border in the diagrams.
• In small- and medium-sized organizations, some duties must be combined, and the internal auditor must assess whether organizational segregation of duties is adequate.
• Flowcharts presented do not assume use of either a paper-based or an electronic system, except for manual checks and remittance advices.
• Each document symbol represents a business activity or control, whether manual or computerized.
• Understand accounting cycles; related internal should not be memorized; relate generic cycles to how the organization handles the organization itself.
• Responsibilities of Sales-Receivables-Cash Receipts' personnel or departments in the sales-receivables-cash receipts cycle are listed.

Sales-Receivables System Flowchart Table

• Sales receives a customer order and prepares a multi-part sales order then forwards it to Credit with.
• Reconciling sequentially numbered sales orders which helps ensure that orders are legitimate.
• Credit performs a credit check, and then approves the sales order.
• Credit sends copies of the approved sales order to Sales, Inventory Warehouse, Shipping, Billing, and Inventory Control.
• Ensures that goods are shipped only to actual customers and it unlikely to become delinquent.
• Upon receipt of the approved sales order, Sales sends an acknowledgment to the customer.
• Upon receipt of the approved sales order, the Inventory Warehouse pulls the goods and forwards them to Shipping.
• Shipping verifies goods received from Warehouse match the sales order; prepares a packing slip and a bill of lading and ships the goods to the customer.
• Ensures correct goods are shipped.
• Shipping forwards a copy of the packing slip and bill of lading to Inventory Control and Billing.
• Notifies these departments the goods have been shipped.
• Upon receipt of the packing slip and bill of lading, Inventory Control matches them with the sales order and updates the inventory records.
• Upon receipt of the packing slip and bill of lading, Billing matches them with the approved sales order, prepares a multi-part invoice, and sends a copy to the customer
• Accounts Receivable receives an invoice copy from Billing and posts a journal entry to the AR file. -Accounts Receivable prepares a daily invoice summary for the day; forwards it to General Ledger for posting to the GL file.
• The General Ledger receives a daily invoice summary from AR to post to the GL file.

Cash Receipts System Flowchart Table

• Mail Room opens customer mail with two clerks always present -Immediately endorses customer checks - "For Deposit Only into Account XXX." - Separated remittance advices.
• Mails prepares listing of all checks received during the day then forwards Cash to Receiving
• Cash Receipts then prepares the deposit slip; Bank validates the Cash Receipts.
• The Mail Room then sent remittance advices to receivable for updates the AR FIle
• Validated deposit slip returned to GL to compare with remitted listing.
• AR is periodically sends an account statement to all customers to showcase all active sales an payments.

Purchases-Payables-Cash Disbursements

• Responsibilities of personnel and departments in the purchases-payables-cash disbursements cycle include:
• Inventory Control provides authorization for the purchase of goods and performs an accountability function.
• Purchasing issues purchase orders for required goods and inventory warehouse provides over the goods.
• General Ledger maintains the accounts payable control account and other related general ledger accounts.
• Study the flowchart - Understand; visualize the purchases payabless process and controls! - Read the business activity and descriptions within the table.
• Inventory control prepares or purchase requisition inventory reaches re-order point-sales, it sends it to Payables
• Purchasing locates the authorized vendor in the vendor file, order date purchase order purchase file.
• The purchase order is sent to Receiver; Accounts Payable-the receiver copy/has blank quantities.
• Receiving accepts to the copy of the goods order receives a report is forwarded with goods for inventory.
• Receiving sends receiving report much to purchase update inventory records-Payable matches 2 and requests.
• Cash Disbursement Systems Flowchart is also listed to show from operations with vendors-ledger/Treasurer.
• A voucher this system is for all kinds out payment-the other additional considerations listed are: from payments with Budget, requirements like utilities and general ledger like payables but the functions change when other payment.

Payroll

• Responsibilities of personnel: authorized deductions and exemptions, calculate the payroll on human resource reports.
• Timekeeping to oversee employee records.
• Manufactured accounts payables by payroll.
• Study the Flow charts- Understand; visualize all for the processes this to helps for activity and the controls.
• HR sends rates to payroll employees get cards for each tasks they perform.
• Summaries are checked to see authorized rates.
• AP from payroll records, disbursements compare totals if voucher for amount.
• Check if the following are distributed is treasure with the function.

Management Controls

• Ethical roles, consciousness of the board and seniors, must be ethical.
• Roles and responsibilities of management require control for CEO as organization.
• The officers have the controls with accounting. The board ethics and values for selections.
• Effective board and members of judgment and decisions for the objective.
• Important committees need control for audits as well as management for internal controls.
• Design systematic reviews and independents for not electing executing. Must involve a higher position for control.
• Assigned personnel should have their qualifications. New employees must be investigated. Employees need training with standards or supervision to ensure reliability.
• Accounting is the finance of the means of control. The fit the needs for decision and be responsible. Report for results and identify costs.

Budgeting

• With expects should expressed in numerical forms in order for resources.
• Responsible should participate within formation. With events known to vary on variance.
• Should tie the objective the all with measurable numbers.
• Sharp for structures they have.

Reporting

• What functions of management basis reports its receives. Has to be economical an meaninful
• Should accordance report assign for responsibilities
• Unite needs requirements reports on on required unit
• Must weights against its accumulated is benefits
• Must simple to nature an to the readers must come for classifications.
• Controllable must for segregated when standards an qualities.
• Exception is attention and should be design.
• Time and timely matter for precise.
• What improved to have reporting and should be pulled.
• Listed must show management with objectives,
• Production with high quality and specification.
• Debt with the safeguards as a result,
• Instruments for bank can for what the level cash flow.
• Inventory and control for the theft that need from access. An data can be complete from reconciliation.
• What managed or has to be has the ability to have better quality. An for parts you have.

Insurance

• Must has service control or providers. So those those be illegitimate.
• Has insurance function should also be disbursement.
• Amount of insurer adjuster should be able to to reported upon.
• System for valuation of the risk.
• Resources to the payment in the end must have their claims.