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MQC - GBERMIC - Module 17

The document outlines a course on Governance, Business Ethics, Risk Management, and Internal Control, specifically focusing on internal control over liabilities and equity. It details learning objectives related to accounts payable, other debts, and equity, along with potential misstatements and internal control measures. The content emphasizes the importance of proper authorization, segregation of duties, and maintaining adequate records to prevent errors and fraud in financial transactions.

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Crisel Silva
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4 views5 pages

MQC - GBERMIC - Module 17

The document outlines a course on Governance, Business Ethics, Risk Management, and Internal Control, specifically focusing on internal control over liabilities and equity. It details learning objectives related to accounts payable, other debts, and equity, along with potential misstatements and internal control measures. The content emphasizes the importance of proper authorization, segregation of duties, and maintaining adequate records to prevent errors and fraud in financial transactions.

Uploaded by

Crisel Silva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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MARY THE QUEEN COLLEGE PAMPANGA, INC.

Guagua, Pampanga

INSTITUTE OF ACCOUNTANCY

Course Code – Title:

GBRMIC-Governance, Business Ethics, Risk Management and Internal Control

Course Description:

Governance, Business Ethics, Risk Management and Internal Control Accounting aims
to equip accountancy students the basic knowledge, skills and perspective that are
necessary in facing the challenge in the continuously changing business environment
whether it be in the public practice sector, accounting practice, internal audit or
accounting information system management.

Module No – Title : MO17 – Internal Control Affecting Liabilities and Equity


Time Frame : 1 week – 3 hrs

Learning Objectives

1. Describe the internal control over liabilities and equity accounts, namely:
a. Accounts Payable
b. Other Debts (Notes Payable, Bonds)
c. Equity (Share Capital, Dividends)

2. Understand the potential misstatements due to error or fraud of the liability


and equity accounts and how weakness in internal control contributes to the
risks of misstatements.

Content/Discussion

CHAPTER 17: INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY

Internal Control Over Accounts Payable

The term accounts payable (often to as vouchers payable for a voucher system) is used
to describe short-term obligation arising from the purchase of goods and services in the
ordinary course of business. Typical transactions creating accounts payable include the
acquisition on credit of merchandise, raw materials, plant assets and office supplies.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga

INSTITUTE OF ACCOUNTANCY
Invoices and statements from supplies usually evidence accounts payable arising from
the purchase of goods or services and most other liabilities. However, accrued liabilities
(sometimes called accrued expenses) generally accumulate over time, and
management must make accounting estimates of the year-end liability. Such estimates
are often necessary for salaries, pensions, interest, rent, taxes and similar items.

Discussion of internal control applicable to accounts payable may logically be extended


to the entire purchase or acquisition cycle.

Potential Misstatements – Accounts Payable

Internal Control
Description of Weakness or Factors
Examples
Misstatement that Increase the Risk of
the Misstatement

Inaccurate recording of a Fraud:


purchase or disbursement A bookkeeper prepares a Inadequate segregation of
check to himself and duties of record keeping
records it as having been and preparing cash
issued to a major supplier. disbursements, or check
signer does not review and
cancel supporting
documents.

Error:

A disbursement is made to Ineffective controls for


pay invoice for goods that matching invoices with
have not been received. receiving documents
before disbursements are
authorized.

Misappropriation of Fraud:
purchases
Goods are ordered but Ineffective controls for
delivered to an matching invoices with
inappropriate address and receiving documents
stolen. before disbursements are
authorized.
MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga

INSTITUTE OF ACCOUNTANCY
Duplicate recording of Error:
purchases A purchase is recorded
when an invoice is Ineffective controls for
received from a vendor review and cancellation of
and recorded again when supporting documents by
a duplicate invoice is sent the check signer.
by the vendor.

Late (early) recording of Fraud:


cost of purchase – “cutoff Purchases journal “closely Ineffective board of
problems” early” with this period’s directors, audit committee,
purchases recorded as or internal audit function,
having occurred in “tone at top” not conducive
subsequent period. to ethical conduct; undue
pressure to meet earnings
target.

INTERNAL CONTROL OVER OTHER DEBTS


Business corporations obtain substantial amounts of their financial resources by
incurring debt and issuing capital stock. The acquisition and repayment of capital is
sometimes referred to as the financing cycle. This transaction cycle includes the
sequence of procedures for authorizing, executing, and recording transactions that
involve bank loans, mortgages, bonds payable, and capital stock as well as the
payment of interest and dividends.

Internal Control over Debt

 Authorization by the Board of Directors


Effective internal control over debt begins with the authorization to incur the debt. The
bylaws of a corporation usually require that the board of directors approve borrowing.
The treasurer of the corporation will prepare a report on any proposed financing,
explaining the need for funds, the estimated effect of borrowing upon future earnings,
the estimated financial position of the company in comparison with others in the industry
both before and after the borrowing, and alternative methods of raising the funds.
Authorization by the board of directors will include review and approval of such matters
as the choice of a bank or trustee, the type of security, registration with the SEC,
agreements with investment bankers, compliance with requirements of the state of
incorporation, and listing of bonds on a securities exchange.

 Use of an Independent Trustee


MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga

INSTITUTE OF ACCOUNTANCY
Bond issues are always for large amounts – usually many millions of pesos. Therefore,
only relatively large companies issue bonds: small companies obtain long-term capital
through mortgage loans or other sources.
The trustee is charged with the protection of the creditors’ interest and with monitoring
the issuing company’s compliance with the provisions of the indenture.

 Interest Payments on Bonds and Notes Payable


Many corporations assign the entire task of paying interest to the trustee for either
bearer bonds or registered bonds. Highly effective control is then achieved, since the
company will issue a single check for the full amount of the semiannual interest
payment on the entire bond issue.

Internal Control Over Owners’ Equity


The three principal elements of strong internal control over share capital and dividends;
1. the proper authorization of transactions by the board of directors and corporate
office;
2. the segregation of duties in handling these transactions (preferably the use
payments), and
3. the maintenance of adequate records.

Internal Control on Equity

 Control of Share Capital Transactions by the Board of Directors


All changes in share capital accounts should receive formal advance approval by the
board of directors. The board of directors must determine the number of shares to be
issued and the price per share; if an installment plan of payment is to be used, the
board must prescribe the terms.
Authority for all dividend actions rests with the directors. The declaration of a dividend
must specify not only the amount per share but also the date of record and the date of
payment.

 Independent Registrar and Stock Transfer Agent


In appraising internal control over share capital, the first question that the auditors
consider is whether the corporation employs the services of an independent share
registrar and a share transfer agent or handles its own capital share transactions.

 Internal Control over Dividends


MARY THE QUEEN COLLEGE PAMPANGA, INC.
Guagua, Pampanga

INSTITUTE OF ACCOUNTANCY
The nature of internal control over the payment of dividends, as in the case of stock
issuance, depends primarily upon whether the company performs the function of
dividend payment itself or utilizes the services of an independent dividend-paying agent.
If an independent dividend-paying agent is used, the corporation will provide the agent
with a certified copy of the dividend declaration and a check for the full amount of the
dividend. The bank or trust company serving as stock transfer is usually appointed to
distribute the dividend since it maintains the detailed records of shareholders.

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