AISCH04 Transaction Processing and The Internal Control Process

Transaction Processing
and
the Internal Control
Process4
Chapter
2004 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, by Bodnar/Hopwood
41
Learning Objective 1
Understand the nature

of control exposures.
42
Controls and Exposures

Controls are needed to reduce exposures.
An exposure consists of the potential
financial effect of an event multiplied
by its probability of occurrence.
Controls rarely affect the causes of exposures.

43
Common Exposures
Excessive
costs
Business
interruption
Inaccurate
accounting
Deficient
revenues
EXPOSURES
Fraud and
embezzlement
Loss of
assets
Statutory
sanctions
Competitive
disadvantages
44
Fraud and White-Collar Crime

What is white-collar crime?
Grouping of illegal activities that are differentiated
from other illegal activities in that they occur
as part of the occupation of the offender.
It often involves the entry of fictitious

transactions into an accounting system.
45
Employee theft
Employee-outsider theft
Management fraud
46

White-collar crime may result in
fraudulent financial reporting.
Corporate crime is a white-collar crime that

benefits a company or organization rather
than the individuals who perpetrate the fraud.
47

What is forensic accounting?
Forensic accounting is one of several terms

used to describe the activities of persons
who are concerned with preventing and
detecting fraud and white-collar crime.
48
Computer Processing
and Exposures
Computer processing can increase
the risk and/or potential
dollar loss of exposures.
Mechanical processing of data
Mechanical data storage
Complexity of processing
49
Control Objectives
and Transaction Cycles
Most organizations experience the
same types of economic events.
These events generate transactions that

may be grouped according to four
common cycles of business activity.
Control Objectives
Revenue
cycle
Expenditure
cycle
Production
cycle
Finance
cycle
Control Objectives
Customers should be authorized in accordance

with managements criteria.
Prices and terms of goods and services should be
authorized in accordance with managements criteria.
All shipments of goods and services provided
should result in a billing to the customer.
Billings to customers should be accurately and
promptly classified, summarized, and reported.
Control Objectives
Vendors should be authorized in accordance

Employees should be hired in accordance
Access to personnel, payroll, and disbursement records should
be permitted only in accordance with managements criteria.
Compensation rates and payroll deductions should be
authorized in accordance with managements criteria.
Amounts due to vendors should be accurately and
promptly classified, summarized, and reported.
Control Objectives
The production plan should be authorized in

accordance with managements criteria.
Cost of goods manufactured should be
accurately and promptly classified,
summarized, and reported.
Control Objectives
The amounts and timing of debt transactions

should be authorized in accordance with
managements criteria.
Access to cash and securities should be permitted
only in accordance with managements criteria.
Discuss the concept of the

internal control process.
External Influences Concerning

an Entity and Internal Control
The Federal Foreign Corrupt Practices Act of
1977 (FCPA) is a specific legal requirement
that concerns many organizations.
It requires all companies who are subject to

the Securities Exchange Act of 1934 to...

...make and keep books, records,
and accounts, which in reasonable
detail, accurately and fairly reflect
the transactions and dispositions
of the assets of the issuer;
devise and maintain a system of internal

accounting controls sufficient to
provide reasonable assurance that...

1. transactions are executed in accordance
with managements authorization;
2. transactions are recorded as necessary;
3. access to assets is permitted only in
accordance with managements authorization;
4. the recorded accountability for assets

is compared with the existing assets.

5-member Public Company

Accounting Oversight Board
Restrictions on nonaudit services
Role of the audit committee


Conflicts of interest
Corporate responsibility
for financial reports
Insider trades during pension

fund blackout periods prohibited

Prohibition on personal loans

to executives and directors
Code of ethics
Management assessment
of internal controls
Components of the Internal

Control Process
An organizations internal control
process consists of five elements:
1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring
Control Environment
The first component of internal
control is the control environment.
Factors included in the control
environment are as follows:
Integrity and ethical values
Commitment to competence
Control Environment
Management philosophy and operating style
Organizational structure
Attention and direction provided by the
board of directors and its committees
Manner of assigning authority and responsibility
Human resource policies and procedures

Control Environment
What are other aspects of human
resources and procedures?
Segregation of duties
Supervision
Job rotation and forced vacation
Dual control
Risk Assessment
The second component of internal
control is risk assessment.
Risk assessment is the process of

identifying, analyzing, and managing
risks that affect the companys objectives.
Control Activities
The third component of internal
control is control activities.
These include accounting controls designed

to provide reasonable assurance that the
following control objectives are met:
Control Activities
Segregation of duties
Design and use of adequate
documents and records
Access to assets is permitted only in

accordance with managements authorization.
Control Activities
Independent checks and reviews are made
on the accountability of assets and performance.
Information processing controls are applied

to check the proper authorization, accuracy,
and completeness of individual transactions.
Information and
Communication
The fourth component of internal control
is information and communication.
Information refers to the
organizations accounting system.
Communication relates to providing a clear

understanding regarding all policies
and procedures relating to controls.
Information and
Communication
What is an audit trail?
An audit trail is comprised of the documentary

evidence of the various control techniques that
a transaction was subject to during its processing.
Monitoring
The fifth component of internal
control is monitoring.
It involves the ongoing process of

assessing the quality of internal
controls over time and taking
corrective actions when necessary.
Identify general and application

processing controls.
Transaction Processing Controls

Transaction processing controls
General controls
Application controls
The plan of data processing organization

General operating procedures
Equipment control features
Equipment and data-access controls

Input
Processing
Output
Preventative
Detective
Corrective
Discuss the behavioral assumptions

inherent in traditional internal
control practices.
Communicating the Objectives

of Internal Control
The principal function of internal

control is to influence the behavior
of people in a business system.
Goals and Behavioral Patterns

What are some of the goals
of an information system?
Productivity
Reliability of information
Safeguarding of assets
Goals and Behavioral Patterns
It is agreement or conspiracy among

two or more people to commit fraud.
What factors may influence an individuals
behavior in a control system?
Formal plan of organization and methods employed
Groups and informal pressure

Describe the techniques used to

analyze internal control systems.
Analysis of Internal
Control Processes
Internal control processes routinely collect
information concerning the following:
Fulfillment of duties
Transfer of authority
Approval
Verification
Analytical Techniques
The internal control questionnaire is
a common analytical technique
used in internal control analysis.
Questionnaires are essentially checklists

to ensure that a review does not omit
an area of major importance.
Analytical Techniques
What are other forms of analysis?
Write-ups
Flowcharts
Application control matrix

End of Chapter
4
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Transaction Processing

Understand the nature

Controls and Exposures

Controls rarely affect the causes of exposures.

Fraud and White-Collar Crime

It often involves the entry of fictitious

Fraud and White-Collar Crime

Fraud and White-Collar Crime

Corporate crime is a white-collar crime that

Fraud and White-Collar Crime

Forensic accounting is one of several terms

These events generate transactions that

Customers should be authorized in accordance

Vendors should be authorized in accordance

The production plan should be authorized in

The amounts and timing of debt transactions

Discuss the concept of the

External Influences Concerning

It requires all companies who are subject to

External Influences Concerning

devise and maintain a system of internal

External Influences Concerning

4. the recorded accountability for assets

External Influences Concerning

5-member Public Company

Role of the audit committee

External Influences Concerning

Insider trades during pension

External Influences Concerning

Prohibition on personal loans

Components of the Internal

Human resource policies and procedures

Risk assessment is the process of

These include accounting controls designed

Access to assets is permitted only in

Information processing controls are applied

Communication relates to providing a clear

An audit trail is comprised of the documentary

It involves the ongoing process of

Identify general and application

Transaction Processing Controls

Transaction Processing Controls

The plan of data processing organization

Equipment and data-access controls

Transaction Processing Controls

Transaction Processing Controls

Discuss the behavioral assumptions

Communicating the Objectives

The principal function of internal

Goals and Behavioral Patterns

Goals and Behavioral Patterns

It is agreement or conspiracy among

Groups and informal pressure

Describe the techniques used to

Questionnaires are essentially checklists

Application control matrix

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