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Internal Control Affecting Liabilities and Equity

This document discusses internal controls related to liabilities and equity. It covers controls over accounts payable, accrued liabilities, potential misstatements in accounts payable, internal controls over debt, controls over owner's equity transactions, and controls over dividend payments. The key aspects are proper authorization of transactions, segregation of duties, and maintenance of adequate records.

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Princess Carol Holanda
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2K views8 pages

Internal Control Affecting Liabilities and Equity

This document discusses internal controls related to liabilities and equity. It covers controls over accounts payable, accrued liabilities, potential misstatements in accounts payable, internal controls over debt, controls over owner's equity transactions, and controls over dividend payments. The key aspects are proper authorization of transactions, segregation of duties, and maintenance of adequate records.

Uploaded by

Princess Carol Holanda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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INTERNAL CONTROL

AFFECTING
LIABILITIES
AND EQUITY
INTERNAL CONTROL OVER ACCOUNTS PAYABLE

Accounts Payable – is used to describe short term obligations


arising from the purchase if goods services in the ordinary course
of business.

Accrued Liabilities – generally accumulate over time and


management must make accounting estimates of the year end
liability.
POTENTIAL MISTATEMENTS – ACCOUNTS
PAYABLE Internal control weakness
Description of Mistatement Examples or factors that increase the
risk of mistatement

Inaccurate recording of FRAUD Inadequate segregation of duties of


purchase or disbursements record keeping preparing cash
• A bookkeeper prepares a check to disbursements or check signer does
himself and records it as having not review and cancel supporting
been issued to a major supplier. documents.
FRAUD Ineffective controls for matching
Misappropriation of purposes invoices with receiving documents
• Goods ordered but delivered to an before disbursements are
inappropriate address and stolen. authorized.
ERROR
Duplicate recording of Ineffective controls for review and
• A purchase is recorded when an cancellation of supporting
purchases invoice is receive from a vendor and documents by the check signer.
recorded again when a duplicate
invoice is sent by the vendor.
FRAUD
Late ( early ) recording of cost Ineffective board of directors, audit
• Purchases journal committee , or internal audit
of purchase – “ closely early “ with this period’s function ; “tone at the top” not
“ cut off problems “ purchases recorded as having conducive to ethical conduct ; undue
accured in subsequent period. pressure to meet earnings target.
INTERNAL CONTROL OVER DEBTS

Financing cycle - the acquisition and repayment of capital.


- this transaction cycle includes the sequence of procedures for
authorizing , executing and recording transactions.
Internal Control Over Debt
• Authorization by the Board of Directors
• Use of an independent trustee
• Interest payments on bonds and notes payable
INTERNAL CONTROL OVER OWNER’S 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 of 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 should receive formal advance approval of the board of
directors.
- Authority for all dividend actions rest with the directors. The declaration of a dividend must
specify not only the amount per share but also the date of record and date of payment.
• Independent registrar and stock transfer agent
- Internal control is far stronger when the services of an independent share registrar are
utilized because the banks or trust companies acting in these capacities will have the experience,
the specialized facilities , and the trained personnel to perform the work in an expert manner.
INTERNAL CONTROL OVER DIVIDENDS

• 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
paying agent .

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