“Accounting is closely connected with control”. Elaborate the statement and discuss the role of accounting feedback in the process of control.
Solution: Controls are an integral part of any organization's financial and Accouting Process Controls consists of all the measures taken by the organization for the purpose of Internal accounting control and of procedures designed to promote and protect management practices, both general and financial. Following are the role played by accounting in the process of control.
Developing an Internal Accounting Control System
The first step in developing an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. A Guide for Management, includes the following areas and objectives in developing an effective internal accounting control system:
Cash receipts
To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security.
Cash disbursements
To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded.
Petty cash
To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded.
Payroll
To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as payroll tax deposits) are complied with.
Grants, gifts, and bequests
To ensure that all grants, gifts, and bequests are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored.
Fixed assets
To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.
Additional internal controls are also required to ensure proper recording of SALES and other revenues, accurate, timely financial reports and information returns, and compliance with other government regulations.
Achieving these objectives requires your organization to clearly state procedures for handling each area, including a system of checks and balances in which no financial transaction is handled by only one person from beginning to end. This principle, called segregation of duties, is central to an effective internal controls system. Even in a small nonprofit, duties can be divided up between paid staff and volunteers to reduce the opportunity for error and wrongdoing. For example, in a small organization, the director might approve payments and sign checks prepared by the bookkeeper or office manager. The board treasurer might then review disbursements with accompanying documentation each month, prepare the bank reconciliation, and review canceled checks.The board and executive director share the responsibility for setting a tone and standard of accountability and conscientiousness regarding the organization's assets and responsibilities. The board, usually through the work of the finance committee, fulfills that responsibility in part by approving many aspects of the internal control accounting system. Common areas requiring board attention include:
Developing an Internal Accounting Control System
The first step in developing an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. A Guide for Management, includes the following areas and objectives in developing an effective internal accounting control system:
Cash receipts
To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security.
Cash disbursements
To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded.
Petty cash
To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded.
Payroll
To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as payroll tax deposits) are complied with.
Grants, gifts, and bequests
To ensure that all grants, gifts, and bequests are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored.
Fixed assets
To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.
Additional internal controls are also required to ensure proper recording of SALES and other revenues, accurate, timely financial reports and information returns, and compliance with other government regulations.
Achieving these objectives requires your organization to clearly state procedures for handling each area, including a system of checks and balances in which no financial transaction is handled by only one person from beginning to end. This principle, called segregation of duties, is central to an effective internal controls system. Even in a small nonprofit, duties can be divided up between paid staff and volunteers to reduce the opportunity for error and wrongdoing. For example, in a small organization, the director might approve payments and sign checks prepared by the bookkeeper or office manager. The board treasurer might then review disbursements with accompanying documentation each month, prepare the bank reconciliation, and review canceled checks.The board and executive director share the responsibility for setting a tone and standard of accountability and conscientiousness regarding the organization's assets and responsibilities. The board, usually through the work of the finance committee, fulfills that responsibility in part by approving many aspects of the internal control accounting system. Common areas requiring board attention include:
Check issuance
The number of signatures on checks, dollar amounts which require board approval or board signature on the check, who authorizes payments and financial commitments, etc.
Deposits
How payments made in cash (for admissions, raffles, weekly collection plate, etc.) will be handled, etc.
Transfers
If and when the general fund can borrow from restricted funds, etc.
Approval of plans and commitments before they are implemented
The annual budget and periodic comparisons of financial statements with budgeted amounts, leases, loan agreements, and other major commitments.
Personnel policies
Salary levels, vacation, overtime, compensatory time, benefits, grievance procedures, severance pay, evaluation, and other personnel matters.
The Accounting Procedures Manual
The policies and procedures for handling financial transactions are best recorded in an Accounting Procedures Manual, describing the administrative tasks and who is responsible for each. The manual does not have to be a formal document, but rather a simple description of how functions such as paying bills, depositing cash, and transferring money between funds are handled. As you start to document these procedures, even in simple memo form, the memos themselves can be kept together to form a very basic Accounting Procedures Manual. Writing or revising an Accounting Procedures Manual is a good opportunity to see whether adequate controls are in place. In addition, having such a manual facilitates smooth turnover in financial staff.
Maintaining Effective Controls
The FINANCE/ACCOUNTING director is commonly responsible for overseeing the day-to-day implementation of these policies and procedures.
The auditor's management letter is an important indicator of the adequacy of your internal accounting control structure, and the degree to which it is maintained. The management letter, which accompanies the audit and is typically addressed to the board as trustees for the organization, cites significant weaknesses in the system or its execution. By reviewing the management letter with the executive director, asking for responses to each internal control lapse or recommendation, and comparing management letters from year to year, the board has a useful mechanism for monitoring its financial safeguards and adherence to financial policies.
As your profit changes and matures, and your funding and programs change, you will need to periodically review the internal accounting control system which you have established and modify it to include new circumstances (bigger staff, more restricted funding, etc.) and regulations (such as receiving federal awards with increased compliance demands.)
Internal Controls Simplified ACCOUNTING INFORMATIONS USED AS CONTROLS: CASH
-Control Cash Drawers And Credit Cards
-Control Cash Receipts And Deposits
-control system to Manage Problem Checks
-control system to Manage Wire Transfers
-Control to Cheque Signing Authority
-control system to Manage Check Requests
-control system to Manage Bank Account Reconciliations
-control system to Manage Petty Cash
GENERAL & ADMINISTRATIVE
-control system Manage Chart of Accounts
-system to Control Files And Records Management
-control system to Manage Travel And Entertainment
-system to Control Management Reports
-system to Control Period-End Review & Closing
-control system to Manage Controlling Legal Costs
-control system to Manage Taxes And Insurance
-system to Control Property Tax Assessments
-control system to Manage Confidential Information Release
-system to Control Documents
The number of signatures on checks, dollar amounts which require board approval or board signature on the check, who authorizes payments and financial commitments, etc.
Deposits
How payments made in cash (for admissions, raffles, weekly collection plate, etc.) will be handled, etc.
Transfers
If and when the general fund can borrow from restricted funds, etc.
Approval of plans and commitments before they are implemented
The annual budget and periodic comparisons of financial statements with budgeted amounts, leases, loan agreements, and other major commitments.
Personnel policies
Salary levels, vacation, overtime, compensatory time, benefits, grievance procedures, severance pay, evaluation, and other personnel matters.
The Accounting Procedures Manual
The policies and procedures for handling financial transactions are best recorded in an Accounting Procedures Manual, describing the administrative tasks and who is responsible for each. The manual does not have to be a formal document, but rather a simple description of how functions such as paying bills, depositing cash, and transferring money between funds are handled. As you start to document these procedures, even in simple memo form, the memos themselves can be kept together to form a very basic Accounting Procedures Manual. Writing or revising an Accounting Procedures Manual is a good opportunity to see whether adequate controls are in place. In addition, having such a manual facilitates smooth turnover in financial staff.
Maintaining Effective Controls
The FINANCE/ACCOUNTING director is commonly responsible for overseeing the day-to-day implementation of these policies and procedures.
The auditor's management letter is an important indicator of the adequacy of your internal accounting control structure, and the degree to which it is maintained. The management letter, which accompanies the audit and is typically addressed to the board as trustees for the organization, cites significant weaknesses in the system or its execution. By reviewing the management letter with the executive director, asking for responses to each internal control lapse or recommendation, and comparing management letters from year to year, the board has a useful mechanism for monitoring its financial safeguards and adherence to financial policies.
As your profit changes and matures, and your funding and programs change, you will need to periodically review the internal accounting control system which you have established and modify it to include new circumstances (bigger staff, more restricted funding, etc.) and regulations (such as receiving federal awards with increased compliance demands.)
Internal Controls Simplified ACCOUNTING INFORMATIONS USED AS CONTROLS: CASH
-Control Cash Drawers And Credit Cards
-Control Cash Receipts And Deposits
-control system to Manage Problem Checks
-control system to Manage Wire Transfers
-Control to Cheque Signing Authority
-control system to Manage Check Requests
-control system to Manage Bank Account Reconciliations
-control system to Manage Petty Cash
GENERAL & ADMINISTRATIVE
-control system Manage Chart of Accounts
-system to Control Files And Records Management
-control system to Manage Travel And Entertainment
-system to Control Management Reports
-system to Control Period-End Review & Closing
-control system to Manage Controlling Legal Costs
-control system to Manage Taxes And Insurance
-system to Control Property Tax Assessments
-control system to Manage Confidential Information Release
-system to Control Documents
Accounting Forms applied to the CONTROL SYSTEMS.
-Sample Account Codes
-Account Collection Control Form
-Accounts Receivable Write-Off Authorization
-Asset Disposition Form
-Bad Check Notice
-Bank Wire Instructions
-Bill Of Sale
-Budget vs. Actual Report
-Capital Asset Requisition
-Check Request
-Check Signing Authority Log
-Commercial Invoice
-Credit Application
-Credit Inquiry
-Daily Cash Report
-Daily Flash Report
-Daily Sundry Payable Log
-Department Reporting Summary
-Deposit Log
-Document Change Control
-Entertainment And Business Gift Expense Report
-Financial Statements
-Inventory Count Sheet
-Inventory Inspection Levels
-Inventory Requisition
-Inventory Tag
-Sample Invoice
-Master File Guide Index
-Material Return Notice
-New Vendor Notification
-Non-Disclosure Agreement
-Order And Arrival Log
-Order Form
-Phone Confirmation Checklist
-Purchase Order
-Purchase Order Follow-Up
-Purchase Order Log
-Purchase Requisition
-Receiving and Inspection Report
-Receiving Log
-Records Retention Periods
-Request For Credit Approval
-Request For Document Change
-Returned Goods Authorization
-Sample Sales Order
-Sample Bank And Book Balances Reconciliation
-Shipping Log
-Tax Calendar of Recurring Monthly Dates
-Travel And Miscellaneous Expense Report
-Travel Arrangements Form
-Vendor Survey Form
-Week Cash Flow Report
-Weekly Financial Report
-Wire Transfer Form
-Sample Account Codes
-Account Collection Control Form
-Accounts Receivable Write-Off Authorization
-Asset Disposition Form
-Bad Check Notice
-Bank Wire Instructions
-Bill Of Sale
-Budget vs. Actual Report
-Capital Asset Requisition
-Check Request
-Check Signing Authority Log
-Commercial Invoice
-Credit Application
-Credit Inquiry
-Daily Cash Report
-Daily Flash Report
-Daily Sundry Payable Log
-Department Reporting Summary
-Deposit Log
-Document Change Control
-Entertainment And Business Gift Expense Report
-Financial Statements
-Inventory Count Sheet
-Inventory Inspection Levels
-Inventory Requisition
-Inventory Tag
-Sample Invoice
-Master File Guide Index
-Material Return Notice
-New Vendor Notification
-Non-Disclosure Agreement
-Order And Arrival Log
-Order Form
-Phone Confirmation Checklist
-Purchase Order
-Purchase Order Follow-Up
-Purchase Order Log
-Purchase Requisition
-Receiving and Inspection Report
-Receiving Log
-Records Retention Periods
-Request For Credit Approval
-Request For Document Change
-Returned Goods Authorization
-Sample Sales Order
-Sample Bank And Book Balances Reconciliation
-Shipping Log
-Tax Calendar of Recurring Monthly Dates
-Travel And Miscellaneous Expense Report
-Travel Arrangements Form
-Vendor Survey Form
-Week Cash Flow Report
-Weekly Financial Report
-Wire Transfer Form
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