Page 332 - Accounting Principles (A Business Perspective)

8. Control of cash

The internal control structure of a company consists of "the policies and procedures established to provide
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reasonable assurance that specific entity objectives will be achieved". The three elements of an internal control
structure are the control environment, the accounting system, and the control procedures.

The control environment reflects the overall attitude, awareness, and actions of the board of directors,
management, and stockholders. The accounting system consists of the methods and records that identify,
assemble, analyze, classify, record, and report an entity's transactions to provide complete, accurate, and timely
financial information. The control procedures of a company are additional policies and procedures that
management establishes to provide reasonable assurance that the company achieves its specific objectives. These
control procedures may pertain to proper authorization, segregation of duties, design and use of adequate
documents and records, adequate safeguards over access to assets, and independent checks on performance.

Internal control not only prevents theft and fraud but also serves many purposes:
(1) Companies must implement policies requiring compliance with federal law; (2) personnel must perform their
assigned duties to promote efficiency of operations; and (3) correct accounting records must supply accurate and
reliable information in the accounting reports.
This chapter discusses the internal control structure that a company establishes to protect its assets and
promote the accuracy of its accounting records.
You will learn how to establish internal control through control of cash receipts and cash disbursements, proper
use of the bank checking account, preparation of the bank reconciliation, and protection of petty cash funds. The
internal control structure is enhanced by hiring competent and trustworthy employees, a fact you will appreciate if

you become a business owner.
Internal control

An effective internal control structure includes a company's plan of organization and all the procedures and
actions it takes to:
• Protect its assets against theft and waste.
• Ensure compliance with company policies and federal law.
• Evaluate the performance of all personnel to promote efficient operations.
• Ensure accurate and reliable operating data and accounting reports.
As you study the basic procedures and actions of an effective internal control structure, remember that even
small companies can benefit from using some internal control measures. Preventing theft and waste is only a part

of internal control.
In general terms, the purpose of internal control is to ensure the efficient operations of a business, thus enabling
the business to effectively reach its goals. Since additional control procedures are necessary in a computer
environment, a discussion of these controls concludes this section on internal control.

27 AICPA, Statement on Auditing Standards No. 55, "Consideration of the Internal Control Structure in a
Financial Statement Audit" (New York, 1988), p. 4. The sixth and seventh editions of this text use the
terminology (internal control structure) of the AICPA. Previous editions referred to the "internal control

system."

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