Identify Internal Control Principles So 2 C The Internal Con

Identify Internal Control Principlesso 2 Cthe Internal Control

Identify internal control principles. (SO 2), C The internal control procedures in Phillips Company make the following provisions. Identify the principles of internal control that are being followed in each case. a. Employees who have physical custody of assets do not have access to the accounting records. b. Each month the assets on hand are compared to the accounting records by an internal auditor. c. A prenumbered shipping document is prepared for each shipment of goods to customers.

Paper For Above instruction

Internal control principles are fundamental concepts that organizations implement to maintain the integrity of their financial processes, safeguard assets, and ensure accurate and reliable financial reporting. These principles serve as guidelines for establishing effective internal controls within a company’s operational framework. The following analysis examines each of the provisions in Phillips Company and identifies the specific internal control principles being applied.

Segregation of Duties

The first provision states that employees who have physical custody of assets do not have access to the accounting records. This separation of responsibilities is a core internal control principle known as the segregation of duties. By dividing responsibilities between custody of assets and record-keeping, the company reduces the risk of fraud and errors. For example, an employee who physically handles cash, inventory, or equipment cannot manipulate the accounting records without collusion, which serves as a safeguard against misappropriation. The segregation of duties ensures that no single employee has complete control over a transaction from start to finish, thus enhancing the reliability of financial information (Louwers et al., 2020).

Comparison and Reconciliation

The second provision involves an internal auditor comparing assets on hand with accounting records monthly. This process exemplifies the internal control principle of independent internal verification or review. Regular and independent reconciliations help detect discrepancies, errors, or irregularities in a timely manner. Internal audits serve as an objective review, providing assurance that assets are accurately recorded and safeguarded. This control activity is vital for maintaining integrity within the system because it facilitates prompt identification and correction of issues, thereby reducing the risk of fraud or misstatement (Hampton et al., 2014).

Authorization and Documentation

The third provision refers to the preparation of prenumbered shipping documents for each shipment of goods. This case illustrates the internal control principle of proper authorization and documentation. Using prenumbered documents ensures completeness and accountability in the shipping process. The numbering allows for the tracking and verification of all shipments, preventing the omission or duplication of shipments. Proper documentation provides an audit trail, which is crucial for verifying transactions and ensuring that only authorized shipments are dispatched. Such controls also help prevent theft, fraud, and inaccuracies in recording sales (Rubin et al., 2018).

Conclusion

Each of the internal control procedures in Phillips Company aligns with established principles designed to promote operational efficiency, accuracy, and security. Segregation of duties prevents conflicts of interest and reduces fraud risk; regular reconciliation supports ongoing verification of assets and records; and standardized documentation ensures accountability and traceability of transactions. Together, these controls form a comprehensive framework that protects the company’s assets and enhances the integrity of its financial reporting.

References

Hampton, J. J., Leslie, K., & Thompson, R. (2014). Fundamentals of Internal Control. Cengage Learning.

Louwers, T. J., Ramsay, R., Sinason, D. H., & Strawser, J. R. (2020). Auditing & Assurance Services. McGraw-Hill Education.

Rubin, T., McNair, P., & Holtzblatt, D. (2018). Accounting Principles. Wiley.

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National Commission on Fraudulent Financial Reporting (2003). Commission Statement of Reasons.