CHAPTER 17
INTERNAL CONTROL AFFECTING LIABILITIES AND EQUITY
INTERNAL CONTROL OVER ACCOUNTS PAYABLE
Accounts payable or vouchers payable for a voucher system are described as short
term obligations arising from the purchase of goods and services in the ordinary course
of business. Commonly it takes place when there is an acquisition on credit of
merchandise, equipment, and office supplies.
Other sources of accounts payable are receipt of services. Obligations bearing an
interest are no longer included in accounts payable but are presented in different
manner like bonds, notes, mortgages, and in installments.
Accounts payable arises from the purchase of price can be validated by invoices and
statements from the supplies.
Accrued liabilities or sometimes called accrued expenses accumulate over time and
management must estimate a year – end liability. This is necessary to estimate salaries,
pensions, interest, rent, taxes, and similar items.
Important key notes:
Internal auditing plays a vital role inside the company to recognize the errors and lapses
with regards to accounting especially accounts payable.
Accounts payable of one company is the accounts receivable of the other.
Accounts payable are roughly monitored by the other company since there will be a
problem if there’s a discrepancy in their accounts receivable.
To minimize other illegal activity like fraud, auditors account every liability that the other
company has to them to avoid any accounting problems.
Potential Misstatements.
[Link] recording of a purchase or disbursement.
[Link] of purchases.
[Link] recording of purchases.
[Link] (early) recording of cost of purchase – “cutoff problems”.
INTERNAL CONTROL OVER OTHER DEBTS
Business corporations generate significant financial resources through debt and capital
stock, a process known as the financing level, which involves transactions like bank
loans, mortgages, bonds, and interest payments.
INTERNAL CONTROL OVER DEBT
Authorization by the Board of Directors
Effective debt control starts with authorization to incur debt, typically approved by the
board of directors. The treasurer prepares a report explaining the need for funds, future
earnings, and company financial position. Authorization includes bank selection,
security type, SEC registration, investment banker agreements, state incorporation
compliance, and bond listing. After issuance, the board receives a report detailing debt
net amount and disposition.
Use of an Independent Trustee
Bond issues are typically for large amounts, often millions of pesos, and are typically
issued by large companies with the help of a large bank as an independent trustee. The
trustee safeguards creditors' interests and ensures bond issuance compliance. They
maintain bond ownership records, cancel old certificates, prevent over issuance, and
distribute interest and principal payments. This independent trustee solves internal
control issues, as they lack access to the company's assets and are a large financial
institution with legal responsibility.
Interest payments on Bonds and Notes Payable
Corporate corporations often delegate the responsibility of paying interest to the trustee
for bearer or registered bonds, thereby achieving effective control through a single
check.
INTERNAL CONTROL OVER OWNER’S EQUITY
The three principal elements of strong internal control over share capital and
dividends:
1. The proper authorization of transactions by the board of directors and
corporate office,
2. The segregation of duties in handling these transaction (preferably the used
payments) , and
3. The maintenance of adequate methods.
INTERNAL CONTROL ON EQUITY
Control of Share Capital Transaction by the Board of Directors
All changes in share capital accounts should receive formal advance approval by the
board of directors. The board of directors must determine the number of shares to be
issued and the price per share:
● If an installment plan of payment is to be used, the board must prescribe
the terms.
● If plant and equipment, service or any consideration other than cash is to
be accepted in payment of shares, the board of directors must establish
the valuation of non-cash assets received.
Independent Registrar and Stock Transfer Agent
Internal control is far stronger when tie services of an independent share registrar and
stock transfer agent are utilized because the banks or trust companies acting in these
capacities will have the experience, the specialized facilities and trained personnel to
perform the work in an expert manner.
INTERNAL CONTROL DIVIDENDS
Dividend payment internal control depends on whether the firm handles it internally or
hires a third-party independent agent. If used, the corporation provides a certified copy
of the dividend declaration and a cheque for the entire dividend amount. If an
independent agent is used, the bank or trust business is typically chosen to disburse the
dividend. The agent delivers the corporation a list of payments paid and distributes
dividend cheques to individual shareholders.
In small corporations without a dividend-paying agent, the secretary and treasurer
handle dividend payments. They create a list of shareholders, the number of shares
held, and the amount of dividend each shareholder is to receive once the board of
directors declares a dividend. Dividend checks are issued to individual investors,
regulated by serial numbers. The treasurer must approve and sign the stockholder list
and dividend checks before they can be distributed.
The complete dividend sum is transferred in cash from the main bank account to the
special dividend bank account. When the bank returns the individual dividend checks,
they should be matched with the dividend check register or check stubs. Companies
with a large number of shareholders generate dividend checks in a machine-readable
format to reconcile outstanding checks.
