(Components of internal control) The chapter identified five components of internal control.
Listed below are specific control policies and procedures prescribed by Suntron Company.
1. Management gives careful consideration to the requisite knowledge and skills personnel need at all levels of the organization.
2. General controls and application controls are established in the electronic data processing department.
3. Management acts to reduce or eliminate incentives and temptations that might lead individuals to engage in dishonest or illegal acts.
4. Management is alert to complaints received from customers about billing errors.
5. Management gives special consideration to the risks that can arise from the use of information technology in the accounting system.
6. Employees' responsibilities are assigned so as to avoid any individual's being in a position to both commit an error or irregularity and then conceal it.
7. IT management has designed controls to prevent unauthorized use of IT equipment, data files, and computer programs.
8. The processing of payroll includes a check on the total number of hours submitted. If more than 65 hours are reported in a weekly pay period, the transaction is printed o an exception report and put in a suspense file for additional review or additional authorization.
9. Suntron's internal audit staff periodically assesses the effectiveness of various ICS components.
10. Policy manuals, accounting and financial reporting manuals, and a chart of accounts have been developed and implemented.
Required
a. Identify the components of internal control to which each policy or procedure relates.
b. For each item, identify one other policy or procedure for that internal control component that is not on the preceding list.
10-32 (Components of internal control) Internal controls can be categorized using the following framework.
1. Control environment
2. Risk assessment
3. Information and communication
4. Control activities
4.1. Authorization
4.2. Segregation of duties
4.3. Information processing controls
4.3.1. Computer general controls
4.3.2. Computer application controls
4.3.3. Controls over the financial reporting process
4.4. Physical controls
4.5. Performance reviews
4.6. Controls over management discretion in financial reporting
5. Monitoring
6. Antifraud programs and controls
Following is a list of controls prescribed by Waterfront, Inc.
a. Management has established a code of conduct that includes rules regarding conflicts of interest for purchasing agents.
b. Waterfront has established a disclosure committee to review the selection of new accounting policies.
c. Any computer program revision must be approved by user departments after testing the entire program with test data.
d. The managers of each of Waterfront's manufacturing departments must review all expenditures charged to their responsibility center weekly.
e. The CEO, CFO, and controller review the financial consequences of business risks annually to ensure that controls are in place to address significant business risks.
f. Human resources focuses on ensuring that accounting personnel have adequate qualifications for work performed in billing and accounts receivable.
g. Security software limits access to programs and data files, and keeps a log of programs and files that have been accessed, which is then reviewed by the security manager daily.
h. A computer program prints a daily report of all shipments that have not yet been billed to customers.
i. The controller reviews sales and collections bimonthly.
j. The computer compares the information on the sales invoice with underlying shipping information.
k. Customer billing complaints are directed to internal audit for followup and resolution.
l. The documentary transaction trail for all credit sales is documented in company policy manuals.
m. A committee of the board of directors evaluates and monitors business risks.
n. Access to spreadsheets used in the financial reporting process is limited and spreadsheets are tested with test data on a quarterly basis.
Required
a. Indicate the category of internal control applicable to each procedure using the framework above.
b. Identify an assertion to which each procedure pertains (some procedures may have a pervasive impact on multiple assertions).
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