 Internal Control is involved in every activity –

financial, accounting and operations – of any

organization, whether business or government. It is
so important that the lack of it or its weakness will
have an influential effect on the success of the
organization. A strong internal control will surely
result in better performance. Management, therefore,
should insist on adopting an effective system in their
organizational set-up.

 Internal Control is defined as “the plan of the

organization and the coordinate methods and
measures adopted within a business to safeguard
assets, check the accuracy and reliability of
accounting data, promote operational efficiency, and
encourage adherence to prescribed managerial
policies”.
 Internal Control is a process effected by an
entity’s Board of Director management and
other personnel designed to provide
reasonable assistance regarding the
achievement of objectives in the following
objectives:
* Effectiveness & efficiency of operations
* Reliability of financial reporting
* Compliance with laws and regulations
 Internal Control is divided into three (3) principal
areas (branches) according to the principal
objectives set forth in the definition, as follows:

* Internal Check. This is that area of internal

control whose objective is to safeguard
assets;
* Internal Accounting Control. This is that area
of internal control whose objective is to
check
the accuracy and reliability of accounting
data;
* Internal Administrative Control. This is that
area of internal control whose objective is to
promote operational efficiency and
encourage
adherence to prescribed managerial policies.
 The term Internal Check is broadened through
the years into internal control which now refers
to all means designed by management to enable
it to administer its operations, safeguard
company assets and prevent fraud, waste and
loss, if this could be done.
 Since the beginning, internal control has been
known to be that management tool designed to
prevent fraud, waste and losses. With its
broadened meaning, fraud, waste and losses still
form part of it. It is, therefore, basic in internal
control the task of fraud, waste and loss
prevention.
 This prevention aspect lies in its design and
objectives. An internal control system is said to be
properly designed and effectively functioning if:
 1. It minimizes connivance among employees
within the company environment and outsiders;
 2. It limits opportunities for employees to commit
errors and other illegal and irregular acts.

 It is a truism that there is no control which can stop

connivance as this is done by people; however,
connivance can be minimized or be made difficult
by a strong control.
 A really strong internal control provides a core of
employees who are assets to the organization who
are to move against connivance.
 The importance of being able to identify
opportunities to commit a wrong cannot be set
aside for the simple reason that once opportunities
are present, a sound system of internal control is
necessary.
 Opportunities serve to test the character of any
individual. It is when opportunities are open for one
to commit fraud that a very honest man suddenly
becomes inclined to do things wrong.
 A person may have all the opportunities to commit
fraud, but if he has no inclination, fraud cannot
occur; on the other hand, a person may have all the
inclination in the world but if he has no opportunity
nothing untoward will happen.
 Opportunity and inclination must both be present
for the commission of fraud. But it opportunity
exists more often than not, sooner or later,
inclination will come into the picture.
 Internal control system is important to both the
management and the auditor in the discharge of
their responsibilities.
 Management is charged with the duty of
directing the activities efficiently and effectively,
and of producing financial statements that are
adequate and reliable.
 Internal control aids management in performing
these functions and makes possible that
prevention and prompt detection of fraud,
waste and error.
 It provides a reporting system that brings to
immediate attention unsatisfactory condition
for management to correct or at least alleviate.
 Internal Control consists of methods utilized by management to protect its
interest and to effectively accomplish its goal. These methods, also known as
elements of internal control, are the following:

A. Organization Structure

This is the division of the organization into units and sub-units, and the
assignment of functions to these units and sub-units and the delegation of
people to assume responsibilities thereto.

The plan of organization should provide clear-cut delegations of authority

and definite assignment of responsibility. Faulty structures produce
friction and hamper operating performance. Each employee should know
exactly what his duties and responsibilities are and to whom he shall
report to and whom he shall direct. Authority to direct an employee
should be to only one superior. The duties, qualifications and
responsibilities of each employee and officer should be laid out on a job
description. Thus, the work of employees would be coordinated with one another
and every assignment would have limits within the range of a reasonable
workload.
 B. Procedures
 Procedures are the ways of doing the various
method, steps, and actions that an individual
follows in the performance of his functions.
Procedures must be effective, simple and
economical and should spell-out clearly the
things to be done and the most effective ways of
doing them with the least effort and cost.
 Properly designed procedures will usually attain
results by simple means, dividing the task into
logical understandable sequence that will use the
best talents of each employee.
 Procedures can in themselves lead to
irregularities or maybe so poorly designed as to
cause great waste, loss or errors in the
organization. They should be constantly checked
to keep them in constant shape for effective
management.
 Adherence to policies and procedures in another
way by which control is achieved within the
organization. Some of its desirable
characteristics are: well-defined, clear,
documented and easy to interpret and apply.
Other facilities include:
1. Written Manuals. Procedures should be set
forth in manuals so that company policies and
instructions are explicitly known and uniformly
applied.
2. Forms & Documentations. Internal control
may be enhanced by the design and effective use
of forms requiring adherence to prescribed
procedures. Transactions shall be covered by
sufficient documentation.
 3. Proper Authorization and Approval.
Procedures should provide for a system of
authorization at various levels to prevent
unauthorized actions. The lack of authorization
in any given instance should call for immediate
investigations. A system of approval shall also
be
required to ensure that employees are acting
within their authority.
4. Physical and Mechanical Facilities. These are
defined as those assets, general equipment,
which provide protection and facilitate
performance of work assignments.
5. Accounting and Other Records. These are pieces of
information kept to account for results achieved on day-to-day
activities. It is imperative that the accounting results of operations be
kept current, accurate, clear and impartial. A poor accounting system
opens the door to irregularities and fails to disclose faulty and wasteful
operations. All accounting records should be up-to-date, clear,
understandable, accurate, reliable and useful to establish
accountabilities, fix responsibilities, measure performance, and
provide a basis for periodic reports which are needed for effective
control.
6. Reports. These are summarized information to account individual
stewardship. They comprise the information system controls which is
achieved through information provided to appropriate level of
management.

To be an effective tools for management control, reports must be

timely, accurate, complete, impartial and relevant. Most often, reports
submitted late losses its value.
 This is an independent appraisal activity conducted
within the organization to assist management
achieve an efficient and effective administration of
its affairs.

 Internal auditing is the “control of controls”. It has a

continuing responsibility to ensure that control and
other phases of activities are efficiently working and
undertaken and consequently making
recommendations thus, contributing to the overall
management effectiveness.

 The internal control elements may be compared

with the human senses which monitor to the brain
how the other parts of the body are reacting to
various situations. The moment one of these
sensors are removed, then the systems becomes
weak, affecting the entire human body.
 The objective of Internal Auditing is to assist
all members of management in the effective
discharge of their responsibilities, by
furnishing them with analyses, appraisals,
recommendations, and pertinent comments
concerning the activities reviewed.
 The Internal Auditor is concerned with any
phases of business activity where he can be
of service to management. This involves
going beyond the accounting and financial
records to obtain a full understanding of the
operations under review.
 The attainment of this overall objective involves such
activities as:
* Reviewing and appraising the soundness, adequacy,
and
application of accounting, financial and operating
controls and promoting effective control at
reasonable
cost;
* Ascertaining the extent of compliance with
established
policies, plans and procedures;
* Ascertaining the extent to which company assets are
accounted for and safeguarded from losses of all
kinds;
* Ascertaining the reliability of management data
developed within the organization;
* Appraising the quality of performance in carrying out
assigned responsibilities;
* Recommending operating improvements.
 In line with the broad scope of internal auditing
work, the functions and activities of the internal
audit staff are as follows:
1. Examination of Control Procedures to
Determine their Adequacy & Propriety
2. Verification of Reliability and Integrity of
Information
3. Review of Compliance with Existing Policies,
Plans, & Procedures
4. Review of Means of Safeguarding Assets
5. Appraisal of Performance and Economical &
Efficient Use of Resources
6. Review of Established Objectives & Goals for
Operations
7. Special Assignments
 A specific set of policies, procedures and
activities designed to meet an objectives.
 Characteristics of Controls
1. Automated or Manual
2. Re-conciliating
3. Segregation of Duties
4. Review and Approval of Authorization
5. Safeguarding and Accountability of Assets
6. Preventing or Detecting Error or Fraud.
 CASH
* The employee responsible for cash must
have a safety deposit box or a vault to
which he/she alone has an access.
* Signatories for bank accounts & checks
should be authorized by the BOD.
* Banks should be notified immediately when
authority to sign checks of an officer ends.
* All bank accounts must be in the company’s
name and properly controlled (supported by a
Board Resolution) and recorded in the books of
accounts.
 CASH RECEIPTS
* Cash Receipts/collections should be
acknowledge promptly by a pre-numbered
official receipts (OR), or provisional receipts
(PR)
for post dated checks/s.
* When the post dated checks becomes due, the
PR will be replaced by an OR and the control
number must be clearly indicated in both
receipts for internal control purposes. Also, the
PR must be attached to the duplicate OR.
* Receiving of payments & issuance of receipts
must
be done by the accounting assistant or any
authorized personnel.
 * The OR/PR should be prepared in at least 3
copies, to be distributed as follows:
Original Copy – Payor; Duplicate Copy – for
attachment to deposit slip & collection report
summary; Triplicate Copy – to be retained in
the booklet.
* The OR/PR should contain the following info:
- Date received
- Name of Payor
- Unit No./Lot No./Block No.
- Amount of payment in figures & in words
- Details of payment with corresponding
account title/s
- If check, Name of the Bank, Check No.,
Date
- Name and Signature of the authorized
employee
* When there is an absence in presenting the
statement of account/billing invoice of a unit
owner, always refer to the individual accounts
receivable subsidiary ledger/statement of
account/billing invoice master file for
accurate references.
* For partial payments with interest/penalty,
the amount received should be credited first
to the interest/penalty account before the
principal amount.
* Cancelled OR/PR must be marked “CANCELLED”,
reported as cancelled in the Cash Receipt Book
(CRB) & included in the collection summary and
to be retained for future examination.
 * Cash receipts/collections should be deposited
intact to the bank on the same day or on the
following banking day in the same form they
were received.
* Un-deposited cash receipts/collections must
not be used to defray company expenses or
for
personal cash advances or encashment of
personal checks.
* After verifying that the ORs and deposits are
equal and validated by the bank, the PM
should sign the individual documents to
prove
correctness.
 Deposit Slips
* The accounting assistant or any authorized
personnel should make all the deposits.
* Deposit slips should be supported always by
the
equivalent amount of ORs that are being
deposited
* Duplicate deposit slips should be prepared,
validated by the bank and to be retained on
file.
* Duplicate deposit slips should be compared
with cash receipts/ORs daily by the PM to
monitor the accuracy of transaction.
 Cash Disbursement
* Disbursements are being made using a pre-
numbered check voucher/s (CV).
* The accounting assistant or any authorized
personnel prepares check vouchers in at least
three (3) copies, the distribution of which are as
follows:
Original – Accounting file with supporting
docs.
Duplicate – Payee’s master file
Triplicate – Check vouchers master file
 * Check vouchers must contain the following information:
- Name of Payee, in full
- Details of payment with corresponding
account title/s
- Amount of payment in figures and in words
- Name of Bank and Check Number
- Authorized signatories
* Check vouchers should be always supported by the following
documents:
- Statement of Accounts for regular disbursements such
as
electricity, water, telephone
- Service Invoice for purchase of services
- Sales invoice supported by an approved & PO, PR,
Canvass
Sheet & receiving report for purchased of supplies
* The PM in connection with mathematical accuracy &
supporting schedules should always monitor the check
vouchers.
 Account Receivable

* Each account (unit owner/tenant) must have

separate subsidiary ledger which contains all
entries
for billings made, payments received and balance
outstanding.
* Monthly, prepare a listing of balance by account
and ageing of these accounts.
* Also, on a monthly basis, reconcile total of all
subsidiary ledgers with general ledger account.
* The PM should require that above-mentioned items
be prepare and should allocate time to review
them for compliance.
 Billing

* Review data base monthly and ensure

information are accurate and updated – unit
reference, unit owner/tenant, area, billing rates,
etc.
* Prepare billing promptly and release invoices way
ahead of due date (at least 15 days)
* Test-check invoices against billing summaries or
data base. Account for all invoices making sure
that all unit owners/tenants are billed.
* Test-check total billed amount against expected
targets or budgets. Investigate significant
differences.
THANK YOU