INTRODUCTION

1. This chapter describes the components and other objectives of internal control to assist the BComd and the RAM in establishing other necessary controls that could not be incorporated in the accounting procedures contained in this manual.

2. Internal control concepts apply equally to manual and computerized systems. ABACIS internal controls are outlined in the ABACIS Applications Manual and the ABACIS Security Manual.

3. Management must also be aware that the effectiveness of internal control systems depends upon the competency and dependability of the people using them.

DEFINITION

4. In accordance with Section 5200 of the CICA (Canadian Institute of Chartered Accountants) Handbook, internal control comprises the plan of organization and all the co-ordinate systems established by management to assist in achieving management's objective of ensuring, as far as practical, the orderly and efficient conduct of its business, including the safeguarding of assets, the reliability of accounting records and the timely preparation of reliable financial information.

ELEMENTS OF INTERNAL CONTROL

5. Every organization functions under conditions peculiar to its field of endeavour and with particular requirements. Consequently, there is no "ready-made" or packaged internal control system that meets the needs of all concerns. Management must select the internal controls necessary by comparing the costs to the organization relative to the benefits expected.

6. There are, however, certain basic components that are essential to satisfactory internal control in organizations. These are:

1. a logical organizational plan which clearly identifies lines of authority and delegation of responsibility, and which segregates incompatible functions;

2. an adequate accounting structure (including budgetary techniques, a chart of accounts, procedural manuals and instructions, which reflect the flow of transactions);

3. a complete information reporting structure (internal audit personnel must be responsible for the continuous examination and assessment of all internal controls);

4. transactions should be promptly recorded;

5. competent personnel with integrity should be hired and properly trained;

6. actions are only taken by individuals acting within their authority;

7. adequate physical security for electronic data, including back-ups, and for paper documentation;

8. access to assets should be limited to authorized individuals on a need-to-know basis;

9. accounting records should be compared to assets on a regular basis. This comparison should be done at times by individuals other than those having custody; and

10. management should review the organization's financial operations and position and internal controls at regular and frequent intervals.

ADEQUATE SEGREGATION OF DUTIES

1. Management should follow the following guidelines for segregation of duties to prevent both intentional and unintentional errors:

1. separation of the custody of assets from accounting;

2. separation of the authorization of transactions from the custody of related assets;

3. separation of duties within the accounting function; and

4. separation of operational responsibility from record-keeping responsibility.

PREVENTION OF ERRORS IN JOURNALS AND RECORDS

8. There are seven detailed objectives that an internal control system must meet to prevent errors in journals and records. The organization must ensure that:

1. recorded transactions are valid;

2. transactions are properly authorized;

3. all existing transactions are recorded (no omissions);

4. transactions are properly valued;

5. transactions are properly classified;

6. transactions are recorded at the proper time; and

7. transactions are properly included in subsidiary records and correctly summarized.

CASH REGISTERS

9. Cash registers are useful control devices that can be utilized in any outlet where goods or services are exchanged for cash/cheques/credit slips.

10. However, the device, in itself, does not constitute a control; it is only by exercising supervisory prerogatives and utilizing the various features of the machines that management exercises control. It is that element of the operation in particular which must be independently examined and evaluated.

11. To assist in the evaluation of internal control over cash register transactions, the following questions are presented for use by management:

1. Is there a cash register in use?

2. Is each sale recorded at the time of the transaction?

3. Is a sales receipt given to the customer?

4. Is there a master tape that records all transactions?

5. Is the master tape retained and periodically examined by supervisory or management personnel?

6. Does the machine provide "X" and "Z" readings?

7. Do the "Z" reading tapes include consecutive reading numbers?

8. Are "Z" readings taken by supervisory staff not employed on cash register duties?

9. Are the reading keys secured and accessible only to designated supervisory staff?

10. Do representatives of management periodically carry out independent readings?

11. Are the "Z" reading consecutive numbers verified by NPFAO staff?

12. In ideal circumstances, each of these questions would be answered in the affirmative. Each negative reply indicates a weakening of internal control and the auditor must identify what action, if any, should be taken to minimize such weaknesses.

SERIALLY NUMBERED FORMS

13. The use of serial numbers on documents is a commonly used internal control device. Cheques, tickets, invoices, purchase orders, and many other business papers can be controlled in this manner.

14. Certain documents, such as cheques, purchase orders, and receipts demand accountability for every number in the series with a regular inspection of the documents used. Other documents such as serially numbered admission tickets can be controlled by verifying unused holdings and computing the total value of those issued/sold between verifications.

15. The procedures applicable to the control of serially numbered documents are detailed in Chapter 6.