A system of checks and audit. Systems of control needed in order to carry on the business of an entity in an orderly manner To safeguard its assets To secure as far as possible the accuracy and reliability of its records
Internal Controls should satisfy four objectives
Safeguard assets Promote operational efficiency Provide accurate and reliable information Encourage management and employees to comply with laws and regulation
5 Control Procedures
1. Requiring proper authorization 2. Separation of duties 3. Maintaining adequate documents and records 4. Physical control over assets and documents 5. Independent checks on performance
Requiring proper authorization
Someone is given authority by the business to approve the transaction By giving an employee the authority to carry out a particular policy, the company can hold that person accountable for its implementation
Separation of Duties
No one person is assigned duties that include a combination of the following 4 activities: -Authorization -Execution -Custody -Recording A good system of internal controls to prevent employees from performing more than 1 part of any business transaction
an employee with authority agrees to allow another employee to initiate a transaction (authorization of transactions)
a person who has approval to legally commit the business to a transaction
actually possessing the asset, such as cash or inventory items (handling cash, handling inventory, tools, or fixed assets, writing checks, receiving checks in mail)
entering transactions into the accounting system (preparing source documents, maintaining journals, ledgers or other files, preparing reconciliations)
Maintaining adequate documents and records
Prepared at the time of transaction to ensure accuracy of input, complete info & provide for customer approv. Pre-# to control missing docs and enable tracing Constructed to promote correct prep Pre-# docs & limit access to authorized employees
A comparison of two figures Calculate "industry accepted" ratios for your firm Compare your performance to industry "norms"
Analyze your financial ratios over a period of time (3-5 years) Look for positive and negative trends.
Standards used to evaluate the ratios
with industry average external competitive figures results from the prior period against planned ratio goals
Users of Ratio Analysis
Management- primarily to monitor the operation's performance against predetermined objectives Creditors- usually to assess the risk (liquidity and solvency) Owners- to eval the worth of their investment
liquidity ratio- shows ability to meet short-term obligations Identify relationships between current assests and current liabilities Provide basis for evaluation to meet current obligations (1. current ratio 2. quick ratio)
Measures the companies ability to meet its current obligations with current assets. measures liquidity. current assets must exceed its current liabilities so that current obligations can be met as they become due
assets expect to use up or convert to cash within 1 year Cash, marketable securities, A/R, Inventory, office supplies, and any of the prepays.
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