COMPETENCY BASED LEARNING MATERIAL

Sector : Health, Social and Other Community Development Service

Qualification Title : BOOKKEEPING NC III

Unit of Competency : CHECK INTERNAL POLICY COMPLIANCE

Module Title : CHECKING INTERNAL POLICY COMPLIANCE

ST. NICHOLE’S TECHNICAL SCHOOL, INC.

Date Developed: Document No. NTTA-TM1-07

September 2019 Issued by:
Bookkeeping NC III Date Revised:
NTTA
Developed by:
Checking Policy Compliance
Vangie D. Manguil
Revision # 00
 HOW TO USE THIS COMPETENCY-BASED LEARNING MATERIAL

Welcome!

The unit of competency, “REVIEW INTERNAL CONTROL SYSTEM”, is one of

the competencies of BOOKKEEPING NC III, a course which comprises the
knowledge, skills and attitudes required for a TVET trainee to possess.

This module, CHECKING INTERNAL POLICY COMPLIANCE, covers the

knowledge, skills and attitudes needed in reviewing internal control system
for all types of business organizations.

In this module, you are required to go through a series of learning activities

in order to complete each learning outcome. In each learning outcome are,
Information Sheets, Self-Checks, and Task/Job Sheets. Follow and
perform the activities on your own. If you have questions, do not hesitate to
ask for assistance from your facilitator.

Remember to:
 Walk through all information and complete the activities in each
section.
 Read information sheets and complete the self-check. Suggested
references are included to supplement the materials provided in this
module.
 Most probably, your trainer will also be your supervisor or manager.
He is there to support you and show you the correct way to do things.
 You will be given plenty of opportunities to ask questions and practice
on the job. Make sure you practice your new skills during regular work
shifts. This way you will improve your speed, memory and confidence.
 Use the Self-checks, Task or Job Sheets at the end of each section to
test your own progress. Use Performance Criteria Checklist located
after the sheet to check your performance.
 When you feel confident that you have had sufficient practice, ask you
Trainer to evaluate you. The results of your assessment will be
recorded in your Progress Chart and Accomplishment Chart.
 You need to complete this module before you can proceed to the next
module, PREPARING INTERNAL POLICY COMPLIANCE REPORT.

Date Developed: Document No. NTTA-TM1-07

September 2019 Issued by:
Bookkeeping NC III Date Revised:
NTTA
Developed by:
Checking Policy Compliance
Vangie D. Manguil
Revision # 00
 Bookkeeping NC III

COMPETENCY-BASED LEARNING MATERIALS

List of Competencies

No. Unit of Competency Module Title Code

1. Journalize transactions HCS412301

Journalizing transactions

2. Post transactions HCS412302

Posting transactions

3. Prepare trial balance HCS412303

Preparing trial balance

Preparing financialHCS412304
4. Prepare financial reports
reports

Review internal control Reviewing internal

HCS412305
5.
systems control systems

Date Developed: Document No. NTTA-TM1-07

September 2019 Issued by:
Bookkeeping NC III Date Revised:
NTTA
Developed by:
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Vangie D. Manguil
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 MODULE CONTENT

QUALIFICATION TITLE: BOOKKEEPING NC III

UNIT OF COMPETENCY: REVIEW INTERNAL CONTROL SYSTEM

MODULE TITLE : REVIEWING INTERNAL CONTROL SYSTEM

MODULE DESCRIPTOR: This module covers the knowledge, skills, and

attitudes in reviewing internal control system
for all types of business organizations.

NOMINAL DURATION: 24 hours

LEARNING OUTCOMES:
At the end of this module you MUST be able to:
1. Check policy compliance
2. Prepare policy compliance report

ASSESSMENT CRITERIA:
1. Internal control policy is checked in accordance with industry
practice.
2. Compliance is checked and validated in accordance with the internal
control policy.
3. Compliance reports are prepared in accordance with the internal
control policy.
4. Policy compliance reports are submitted to management.
5. Copies of policy compliance reports are filed for future reference.

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LEARNING OUTCOME NO. 1
Check internal control policy compliance

Contents:

1. Internal Control Fundamentals

2. Principles of Internal Control
3. Checking Internal Control Policy Compliance
Assessment Criteria:

1. Internal control policy is checked in accordance with industry

practice.
2. Compliance is checked and validated in accordance with the internal
control policy.

Conditions:

The participants will have access to:

1. Contextual Learning Laboratory

2. Learning Materials
3. Supplies
 Paper
 Pencil
 Eraser

Assessment Method:

1. Written test
2. Practical exercises
3. Interview

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 Learning Experiences
Learning Outcome 1

CHECK INTERNAL CONTROL POLICY COMPLIANCE

Learning Activities Special Instructions

Read Information Sheet 5.1-1
Internal Control Fundamentals
Answer Self-check 5.1-1 Read and understand the
Information Sheets and check
Compare and check the answers yourself by answering the Self-check.
with the answer keys in You must answer all questions
information sheet 5.1-1 correctly before proceeding to the
Read Information Sheet 5.1-2 next activity.
Principles of Internal Control Perform the Task Sheet and Job
Sheet to help you practice your
Answer Self-check 5.1-2
skills.
Compare and check the answers You may refer to the Information
with the answer keys in Sheets to determine if you are doing
information sheet 5.1-2 the right procedures.
Read Information Sheet 5.1-3 The Performance Criteria Checklist
Categories of Internal Control will guide you and help you evaluate
Answer Self-check 5.1-3 your work as you are practicing your
skill.
Checking Internal Control Policy
Compliance Evaluate your own work using the
Performance Criteria. When you are
Compare and check the answers ready, present your work to your
with the answer keys in trainer for final evaluation and
information sheet 5.1-3 recording.

Perform Task Sheet 5.1 If you have questions about the Task
Sheet and Job Sheet, please ask your
Perform Job Sheet 5.1 trainer.
After doing all activities of this
Leaning Outcome, you are ready to
proceed to Preparing internal policy
compliance report.
 Information Sheet 5.1-1
INTERNAL CONTROL FUNDAMENTALS
Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Define internal control
2. Describe the five components of internal control
3. Enumerate and describe the roles and responsibilities of those who
are involved in internal control

INTRODUCTION
Internal control, as defined in accounting and auditing, is a process
for assuring achievement of an organization's objectives in
operational effectiveness and efficiency, reliable financial reporting, and
compliance with laws, regulations and policies. A broad concept, internal
control involves everything that controls risks to an organization.
It is a means by which an organization's resources are directed,
monitored, and measured. It plays an important role in detecting and
preventing fraud and protecting the organization's resources, both physical
(e.g., machinery and property) and intangible (e.g., reputation or intellectual
property such as trademarks).
At the organizational level, internal control objectives relate to the
reliability of financial reporting, timely feedback on the achievement of
operational or strategic goals, and compliance with laws and regulations. At
the specific transaction level, internal control refers to the actions taken to
achieve a specific objective (e.g., how to ensure the organization's payments
to third parties are for valid services rendered.) Internal control
procedures reduce process variation, leading to more predictable outcomes.

FIVE COMPONENTS OF INTERNAL CONTROL

1. Control Environment sets the

tone for the organization,
influencing the control
consciousness of its people. It is
the foundation for all other
components of internal control.
2. Risk Assessment is the
identification and analysis of
relevant risks to the achievement
of objectives, forming a basis for
how the risks should be managed.

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 3. Information and Communication systems or processes that support
the identification, capture, and exchange of information in a form and
time frame that enables people to carry out their responsibilities.
4. Control Activities are the policies and procedures that help ensure
management directives are carried out.
5. Monitoring are processes used to assess the quality of internal
control performance over time.

ROLES AND RESPONSIBILITIES IN INTERNAL CONTROL

According to the Committee of Sponsoring Organizations (COSO)
Framework, Virtually all employees produce information used in the internal
control system or
take other
actions needed to
affect control.
Also, all
personnel should
be responsible for
communicating
upward problems
in operations,
noncompliance
with the code of
conduct, or other
policy violations
or illegal actions.
Each major entity
in corporate
governance has a
particular role to
play:
1. Management

The Chief Executive Officer (the top manager) of the organization has
overall responsibility for designing and implementing effective internal
control. More than any other individual, the chief executive sets the "tone
at the top" that affects integrity and ethics and other factors of a positive
control environment.
2. Board of directors
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 Management is accountable to the board of directors, which provides
governance, guidance and oversight. Effective board members are objective,
capable and inquisitive. They also have knowledge of the entity's activities
and environment, and commit the time necessary to fulfil their board
responsibilities. A strong, active board, particularly when coupled with
effective upward communications channels and capable financial, legal and
internal audit functions, is often best able to identify and correct such a
problem.
3. Auditors
The internal auditors and
external auditors of the organization
also measure the effectiveness of
internal control through their efforts.
They assess whether the controls are
properly designed, implemented and
working effectively, and make
recommendations on how to improve
internal control. To provide reasonable
assurance that internal controls
involved in the financial
reporting process are effective, they are
tested by the external auditor (the organization's public accountants), who
are required to opine on the internal controls of the company and the
reliability of its financial reporting.
4. Audit committee
The role and the responsibilities
of the audit committee are to:
(a) Discuss with
management, internal and
external auditors and
major stakeholders the
quality and adequacy of
the organization’s internal
controls system and risk
management process.

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 (b) Review and discuss with management and the external auditors
and approve the audited financial statements of the organization
and make a recommendation regarding inclusion of those
financial statements in any public filing.
(c) Review and discuss with management the types of information to
be disclosed and the types of presentations to be made with
respect to the Company's earnings.
(d) Confirm the scope of audits to be performed by the external and
internal auditors.
(e) Manage complaints concerning accounting, internal accounting
controls or auditing matters.
(f) Receive regular reports from the regarding deficiencies in the
design or operation of internal controls and any fraud that
involves management or other employees with a significant role in
internal controls.
(g) Support management in resolving conflicts of interest.
5. Personnel benefits committee

The role and the responsibilities of the personnel benefits are to:
(a) Approve and oversee administration of the Company's
Compensation Program;
(b) Review and approve specific compensation matters
(c) Review, as appropriate, any changes to compensation matters
(d) Review and monitor all human-resource related performance and
compliance activities and reports

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6. Operating staff

All staff members should be

responsible for reporting problems of
operations, monitoring and improving
their performance, and monitoring non-
compliance with the corporate policies
and various professional codes, or
violations of policies, standards,
practices and procedures.
Staff and junior managers may be
involved in evaluating the controls within their own organisational unit
using a control self-assessment.

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 Self- Check 5.1-1
I. MULTIPLE CHOICE: Choose the best answer. Write the letter of your
choice on the answer sheet.

1. Sets the tone for the organization, influencing the control

consciousness of its people.
A. Control environment
B. Risk assessment
C. Monitoring
D. Control activities

2. Responsible for reporting problems of operations, monitoring and

improving their performance, and monitoring non-compliance with the
corporate policies and various professional codes, or violations of
policies, standards, practices and procedures.
A. Auditors
B. Audit Committee
C. Board of Directors
D. Operating staff

3. Process for assuring achievement of an organization's objectives in

operational effectiveness and efficiency, reliable financial reporting,
and compliance with laws, regulations and policies.
A. Risk assessment
B. Monitoring
C. Internal control
D. Control activities

4. Discuss with management, internal and external auditors and major

stakeholders the quality and adequacy of the organization’s internal
controls system and risk management process.
A. Auditors
B. Personnel benefits committee
C. Audit committee
D. Managers

5. Review and monitor all human-resource related performance and

compliance activities and reports.
A. Board of directors
B. Managers
C. Auditors
D. Personnel benefits committee

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 ANSWER KEY 5.1-1

I. MULTILPLE CHOICE

1. A
2. D
3. C
4. C
5. D

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 Information Sheet 5.1-2

PRINCIPLES OF INTERNAL CONTROL

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Enumerate and describe internal control principles
2. Cite the importance of internal control
3. State the limitations of internal control

INTRODUCTION
Regardless of size, every company can benefit from an internal control
system. When creating an accounting system, businesses and non-profit
organizations must establish a framework for internal control. The internal
control process helps to ensure that the system is working well and that all
of the employees involved are performing as expected. Having such an
essential business function provides reasonable assurance by decreasing
the likelihood of mistakes and safeguarding the organization's assets.
Because of its significance, companies do well to consider the fundamental
principles of internal control. .

PRINCIPLES OF INTERNAL CONTROL

1. Establish Responsibilities
Assigning specific responsibilities to individuals ensures they
understand what their part is in maintaining internal control.

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 2. Maintain adequate records
Having correct record-keeping procedures will enable companies to
have an accurate history of transactions on hand. Such historical
data allows for the company to refer to it later, if a problem is
discovered or if clarification is necessary.
3. Insure and assets and bond employees
By insuring assets and bonding employees, an organization can rest
assured that it will be reimbursed for the value of an asset if the asset
is stolen, or otherwise misappropriated.
4. Separate record keeping and custody of assets
The people who have physical access to cash and other assets are not
the same people who keep the records relating to that asset.
5. Divide responsibility for related transactions
It is important that different employees each perform the separate
tasks making up the transaction. This ensures that more than one
person was involved in completing the task, increasing the odds that
any mistakes or fraudulent acts are discovered.
6. Apply technological controls
Burglar alarms, electronic keypads and other technology-based
security features can help organizations protect assets. Technology
can often go where people cannot, and can be on the job 24 hours a
day without requiring extra pay or breaks.
7. Perform regular and independent reviews
Companies must review their internal control systems regularly that
should be done by an individual who did not perform any of the work
being checked.

IMPORTANCE OF INTERNAL CONTROL

Fraud Detection
Internal control plays an
important role in the prevention
and detection of fraud. Under the
Sarbanes-Oxley Act, companies are
required to perform a fraud risk
assessment and assess related
controls. This typically involves
identifying scenarios in which theft
or loss could occur and
determining if the existing internal
controls procedures effectively
manages the risk to an acceptable level. The risk that senior management
might override important financial controls to manipulate financial reporting
is also a key area of focus in fraud risk assessment.

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Process Improvement
Controls can be evaluated and
improved to make a business operation
run more effectively and efficiently. For
example, automating controls that are
manual in nature can save costs and
improve transaction processing. If the
internal control system is thought of
by executives as only a means of preventing
fraud and complying with laws and
regulations, an important
opportunity may be missed. Internal
controls can also be used to systematically improve businesses, particularly
in regard to effectiveness and efficiency.
Controls Monitoring
Advances in technology and data analysis have
led to the development of numerous tools which can
automatically evaluate the effectiveness of internal
controls. Used in conjunction with continuous
auditing, continuous controls monitoring provides
assurance on financial information flowing through
the business processes.

LIMITATIONS OF INTERNAL CONTROL

Internal control can provide reasonable, not absolute, assurance that

the objectives of an organization will be met. The concept of reasonable
assurance implies a high degree of assurance, constrained by the costs and
benefits of establishing incremental control procedures.
Effective internal control implies the organization generates reliable
financial reporting and substantially complies with the laws and regulations
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that apply to it. However, whether an organization achieves operational and
strategic objectives may depend on factors outside the enterprise, such as
competition or technological innovation. These factors are outside the scope
of internal control; therefore, effective internal control provides only timely
information or feedback on progress towards the achievement of operational
and strategic objectives, but cannot guarantee their achievement.

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Self- Check 5.1-2

I. IDENTIFICATION. Write your answer on a separate sheet.

1. Companies must review their internal control systems regularly
that should be done by an individual who did not perform any of
the work being checked.
2. It is important that different employees each perform the separate
tasks making up the transaction. This ensures that more than one
person was involved in completing the task, increasing the odds
that any mistakes or fraudulent acts are discovered.
3. Assigning specific responsibilities to individuals ensures they
understand what their part is in maintaining internal control.
4. Burglar alarms, electronic keypads and other technology-based
security features can help organizations protect assets.
5. The people who have physical access to cash and other assets are
not the same people who keep the records relating to that asset

II. ESSAY: On your answer sheet, answer the following questions:

1. What are the limitations of internal control?
2. Why is internal control important?

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 ANSWER KEY 5.1-2

I. IDENTIFICATION
1. Perform regular and independent reviews
2. Divide responsibility for related transactions
3. Establish responsibilities
4. Apply technological controls
5. Separate record keeping and custody of assets

II. ESSAY
Model Answers
1. Internal control can provide reasonable, not absolute, assurance
that the objectives of an organization will be met. However, whether
an organization achieves operational and strategic objectives may
depend on factors outside the enterprise, such as competition or
technological innovation. Effective internal control provides only
timely information or feedback on progress towards the
achievement of operational and strategic objectives, but cannot
guarantee their achievement.
2. Internal control plays an important role in 1) prevention and
detection of fraud; 2) process improvement to make a business
operation run more effectively and efficiently; 3) controls
monitoring through advances in technology and data analysis
which can automatically evaluate the effectiveness of internal
controls.

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 Information Sheet 5.1-3

CHECKING INTERNAL CONTROL POLICY COMPLIANCE

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Enumerate the contents of an internal control procedures manual.
2. Write/update internal control procedures manual
3. Check effectiveness of an internal control system
4. Prepare an internal control questionnaire

INTRODUCTION
Effective internal control systems should not only include suitable
checks and other control procedures, but they should also include review
processes to ensure that the checks and controls are actually implemented
and complied with. Managers who see internal audit's role in compliance
terms believe that they can rely on internal audit to ensure that controls are
actually reliably followed in all circumstances.

HOW TO WRITE INTERNAL CONTROL PROCEDURES MANUAL

Writing an internal control

procedures manual is vital for all
companies. Internal control
procedures are used to prevent
fraud, and are vital to every well-run
organization. Such systems separate
duties between employees within an
organization. It is important to have
internal control procedures manual
on hand. Employees use them as
references when procedures or duties
are in question. Information
contained in internal control
procedures manual varies from company to company, but the procedure for
writing one is the same.

STEPS:

1. Write an overview and table of contents. The overview briefly

describes fiscal responsibility, which includes the concepts and
components of internal control. The table of contents begins with
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 Segregation of Duties. The contents that typically follow are: Reviews,
Reconciliations, Approvals, Assets, Disbursements, Human
Resources, Purchasing and Contacts.

2. Complete the Segregation of Duties section. Outline details

regarding the separation of duties for things such as employees
receiving and posting payments, as opposed to depositing payments.
Another important separation is that if one employee is a payee,
another employee makes the check out.

3. Determine procedures for the next two sections, Reviews and

Reconciliations. Reviews are procedures set up to routinely perform
budget investigations, spot-check transactions and investigate
unusual activity. The Reconciliations section contains procedures
such as comparing sets of data to ensure accuracy, looking into
differences and taking action. This also includes specifically outlining
that an employee entering transactions does not reconcile any of the
bank accounts.

4. Complete the Approvals, Assets and Distributions sections. The

Approvals part states which employees have authority for approving
transactions. Authority is only given to responsible employees with
detailed knowledge about the company. The Assets section lists all
types of assets within the organization. Under each asset category,
specific procedures are outlined detailing how assets are handled and
monitored. The Distributions section details the company's policies
and procedures of distributing money, including payroll checks.

5. Complete the manual by finishing the last three sections: Human

Resources, Purchasing and Contacts. The Human Resources (HR)
section details instructions for HR employees as to how employee
information is handled. The Purchasing section explains the
company's purchasing procedures. Finally, the Contacts section lists
people in the company who employees can contact when questions or
problems arise.

STEPS IN CHECKING THE EFFECTIVENESS OF AN INTERNAL

CONTROL SYSTEM

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 1. View the five elements of internal controls. These are control
environment, risk assessment, control activities, information and
communication, and monitoring. These five elements all work together
to ensure that the internal control procedures set up are working
effectively. Each element must be present, and the procedures around
the activity must be carefully planned and monitored.
2. Choose the internal control activity you want to check. Verify that
all five elements are included within the procedures of this activity by
beginning with analyzing the control environment. This refers to the
work environment within your organization, the way it is structured
and the supervision in place.
3. Assess risk. With each control activity, a risk assessment is
conducted. This is done to locate potential problems and to focus on
correcting those and reducing the risk.
4. Analyze the management control activities. This step is conducted
in order to make sure that all processes used within the organization
are necessary and have a purpose. Sometimes, within an activity, a
business finds that there are several unnecessary steps being done.
This costs the company extra money and could cause additional
problems because there are more opportunities for mistakes than are
necessary.
5. Assess the information and communication processes used for
this activity. This consists of determining if the appropriate workers
are getting the information needed to effectively do their jobs. This
also includes ensuring that information is only shared with necessary
workers and that there is limited access to certain types of
information.
6. Perform regular evaluations. In order to ensure that internal control
procedures are operating effectively, it is important to check them
regularly, at least once a year. It is also important to have regular
audits conducted from external auditing firms to also check how a
system is functioning.

INTERNAL CONTROL QUESTIONNAIRE (ICQ)

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 Having ascertained, confirmed and recorded the system, the auditor
now needs to carry out a preliminary evaluation of the system in order to
make a decision as to whether he will rely on internal controls and adopt a
systems audit approach or perform extensive substantive testing using a
verification approach to the audit. 
An ICQ is a formal and usually standardized document which
comprises: a list of internal controls in existence and highlights any
weaknesses. It is used in large company audits to place reliance on internal
controls and to design audit approach. 
Objectives of an ICQ: 
1. Ascertain the client’s systems of accounting and internal control
2. Evaluate the control system
3. Identify those controls which indicate strengths in the system upon
which the auditor will seek to place reliance
4. Identify those areas over which there are weak or no controls and
which therefore must be subjected to more extensive substantive
testing and reported by inclusion in the Management Letter. 

Construction of an ICQ

1. It is good practice when designing ICQs to state, as a brief

introduction, a list of control objectives which each sub-system under
consideration should seek to achieve and any business considerations
specific to the enterprise under review which should be taken into
account. The reason for this is essentially to highlight for the audit
staff key areas for their consideration to the audit staff.

2. The questions in an ICQ should be designed to ascertain whether the

control objectives are being achieved and should therefore cover such
aspects as: (a) instructions given to staff in the performance of their
duties (b) authorization procedures (c) documents and procedures
used to originate transactions (d) recording procedures (e) sequence of
procedures (f) custody procedures (g) relative independence of the
persons involved at each stage of a transaction (i.e. segregation
of duties).

3. The questions should be framed such that a Yes/No answer is given,

with a No answer usually indicating a control weakness.

4. An ICQ should carry such basic information as: (a) the name of the
document (ICQ) (b) the system to which it relates (e.g. purchasing
cycle) (c) the client to whom it relates (d) the accounting period under
review (e) evidence of who has prepared and reviewed the document (f)
the provision of columns for: Yes and No answers, comments where
neither Yes or No are applicable, indicating the significance or
Document No. NTTA-TM1-07
Date Developed:
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Bookkeeping NC III NTTA
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 otherwise of apparent weaknesses, references to audit programs  and
references to Management Letters. 

SAMPLE OF INTERNAL CONTROL QUESTIONNAIRE (ICQ)

Self- Check 5.1-3

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I. TRUE OR FALSE. Tell whether the given statement about checking
effectiveness of an internal control system is true or false. Write (T) if the
statement is True and (F) if the statement is False. Write your answer on
a separate sheet.

1. To ensure that the internal control procedures set up are working

effectively, each element of internal control must be present and the
procedures around the activity must be carefully planned and
monitored.

2. To determine if the appropriate workers are getting the information

needed to effectively do their jobs by ensuring that information is
shared by all workers with access to all types of information.

3. To ensure that internal control procedures are operating effectively, it

is important to check them regularly, at least once a month. It is also
important to have regular audits conducted from external auditing
firms to also check how a system is functioning.

4. A risk assessment is to locate potential problems and to focus on

correcting those and reducing the risk.

5. To make sure that all processes used within the organization are
necessary and have a purpose, a business finds that there are several
unnecessary steps being done. This costs the company extra money
and will not cause additional problems because there are more
opportunities for mistakes than are necessary.

II. ENUMERATION
1 – 10 The contents of an internal control procedures manual.

Document No. NTTA-TM1-07

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 ANSWER KEY 5.1-3

I. TRUE OR FALSE
1. T
2. F
3. F
4. T
5. F

II. ENUMERATION:
Contents of an internal control procedures manual
1. Overview
2. Segregation of Duties
3. Reviews
4. Reconciliations
5. Approvals
6. Assets
7. Disbursements
8. Human Resources
9. Purchasing
10. Contacts

Document No. NTTA-TM1-07

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 TASK SHEET 5.1
Title: Prepare an internal control questionnaire (ICQ)

Performance Objective: Given an internal control policy manual

prepare an internal control questionnaire in
accordance with the internal control system
manual.

Supplies/Materials : Paper, pencil, eraser

Equipment/Tool : Computer, printer

Steps/Procedure:
1. Select an area to check for internal control policy compliance.
2. State the control objectives.
3. Formulate questions answerable with YES or NO and in
accordance with the control objectives. (Note: Follow sample
format provided)
4. Provide a space for suggestion/recommendation.
5. Provide space for signatures of who has prepared and reviewed
the document.
6. Copy/print the internal control questionnaire (ICQ) on a clean
sheet of paper using the proper headings.

Assessment Method:
Portfolio, Written test, Practical exercises, Interview

Document No. NTTA-TM1-07

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SAMPLE FORMAT OF AN ICQ

INTERNAL CONTROL QUESTIONAIRE

PURCHASING

Client: Balance Sheet Date:

Completed by: Reviewed by:

Date: Date:

Objective: To ascertain that purchases are authorized, approved, obtained at a

reasonable price and are necessary for the company.
Yes,
No, Comments
N/A
Is the purchasing function separate
from accounting and receiving?
Does the organization obtain
competitive bids for items, such as
rental or service agreements, over
specified amounts?
Is the purchasing officer required to
obtain additional approval on
purchase orders above a stated
amount?
Are there procedures to obtain the best
possible price for items not subject to
competitive bidding requirements,
such as approved supplier lists and
supply item catalogues?
Are purchase orders required for
purchasing all equipment and
services?
Are purchase orders controlled and
accounted for by pre-numbering and
keeping a logbook?
Are the organization’s normal policies,
such as competitive bid requirements,
the same as grant agreements and
related regulations?
Is the purchasing department required
to maintain control over items or
amounts requiring advance approval?
Suggestion/Recommendation:

Document No. NTTA-TM1-07

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 Performance Criteria Checklist 5.1

CRITERIA
YES NO
Did you….
1. Select an area to check for internal control policy
compliance?
2. State the control objectives?
3. Formulate questions answerable with YES or NO
and in accordance with the internal control
objectives?
4. Provide a space for suggestion/recommendation?
5. Provide space for signatures of who has prepared
and reviewed the document?
6. Copy/print the internal control questionnaire
(ICQ) on a clean sheet of paper using the proper
headings?
7. Finish the task based on the allotted time?
8. Use the tools, equipment and materials properly?

Document No. NTTA-TM1-07

Date Developed:
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Bookkeeping NC III NTTA
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00
 JOB SHEET 5.1
Title: Validation of internal control policy compliance

Performance Objective: Given an internal control policy manual check

and validate compliance of internal control
policies in accordance with the internal
control system using the ICQ.

Supplies/Materials : Paper, pencil, eraser

Equipment/Tools : Computer, printer

Steps/Procedure:
1. Determine the area of internal control compliance check.
2. Prepare the internal control questionnaire (ICQ).
3. Check and validate compliance to the internal control policies
using the ICQ.
4. Print the answered ICQ on a clean sheet of paper with the
proper headings.

Assessment Method:
Portfolio, Written test, Practical exercises, Interview

SAMPLE OF AN ANSWERED ICQ

INTERNAL CONTROL QUESTIONAIRE

PURCHASING

Document No. NTTA-TM1-07

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Client: Purchasing Department Balance Sheet Date: 12/31/2013
Completed by: abc Reviewed by: fmc

Date: 3/31/2014 Date: 3/31/2014

Objective: To ascertain that purchases are authorized, approved, necessary for the
company, obtained at a reasonable price, and records are kept for future reference.
YES,
NO, Comments
N/A
Is the purchasing function separate The purchasing function is separate
YES
from accounting and receiving? from accounting and receiving.
Does the company obtain competitive
bids for items, such as rental or Competitive bids are conducted by
YES
service agreements, over specified the Bids and Awards Committee.
amounts?
Is the purchasing officer required to
obtain additional approval on The purchasing officer seeks approval
YES
purchase orders above a stated for purchases above P5,000.00.
amount?
Are there procedures to obtain the best
possible price for items not subject to
Canvassing of prices are conducted
competitive bidding requirements, YES
before a purchase order is approved.
such as approved supplier lists and
supply item catalogues?
Are purchase orders required for Purchase orders are not required for
purchasing all equipment and NO purchases that are conducted by the
services? Bids and Awards Committee.
Are purchase orders controlled and
Purchase orders are pre-numbered
accounted for by pre-numbering and NO
but no logbook is maintained.
keeping a logbook?
Are the company’s normal policies, Purchasing policy is in accordance
such as competitive bid requirements, YES with the trade regulations and other
the same as related regulations? related regulations.
Is the purchasing department required Advance approval is sought over
to maintain control over items or YES items that are bought for those
amounts requiring advance approval? amounting P5,000.00 and below.

Suggestion/Recommendation: It is recommended that the Purchasing Department

maintains a logbook to account for lost/misplaced purchase orders and keep track for
those that are not bought or delivered.

Document No. NTTA-TM1-07

Date Developed:
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September 2019
Bookkeeping NC III NTTA
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Compliance Vangie D. Manguil
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00
 Performance Criteria Checklist 5.1

CRITERIA
YES NO
Did you….
1. Determine the area of internal control compliance
check?
2. Prepare the internal control questionnaire (ICQ)?
3. Check and validate compliance to the internal
control policies using the ICQ?
4. Print the answered ICQ on a clean sheet of paper
with the proper headings?
5. Finish the task based on the allotted time?
6. Use the tools, equipment and materials properly?

Document No. NTTA-TM1-07

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LEARNING OUTCOME NO. 2
Prepare policy compliance report

Contents:

1. Internal Control Fundamentals

2. Principles of Internal Control
3. Checking Internal Control Policy Compliance
Assessment Criteria:

1. Policy compliance reports are prepared in accordance with the

internal control system
2. Policy compliance reports are submitted to management for
validation.
3. Policy compliance reports are filed for future reference.

Conditions:
The participants will have access to:

1. Contextual Learning Laboratory

2. Learning Materials
3. Supplies
 Paper
 Pencil
 Eraser

Assessment Method:

1. Written test
2. Practical exercises
3. Interview

Document No. NTTA-TM1-07

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 Learning Experiences
Learning Outcome 2

CHECK INTERNAL CONTROL POLICY COMPLIANCE

Learning Activities Special Instructions

Read Information Sheet 5.2-1
Internal Control Fundamentals
Answer Self-check 5.2-1
Compare and check the answers
Read and understand the
with the answer keys in
Information Sheets and check
information sheet 5.2-1
yourself by answering the Self-check.
You must answer all questions
correctly before proceeding to the
next activity.
Perform the Task Sheet and Job
Sheet to help you practice your
skills.
You may refer to the Information
Sheets to determine if you are doing
the right procedures.
The Performance Criteria Checklist
will guide you and help you evaluate
your work as you are practicing your
skill.
Evaluate your own work using the
Performance Criteria. When you are
ready, present your work to your
trainer for final evaluation and
recording.
 INFORMATION SHEET 5.2-1
1.00 BACKGROUND INFORMATION

1.01 Tax Status & Purpose

The following manual is a description of the accounting system and

responsibilities for the accountant of (Client X). (Client X) is a not-for-profit
organization incorporated as a 501(c)(3) organization. (Client X) is registered
with the Secretary of State in Wisconsin with a calendar year end. (Client X) is
also registered with the Wisconsin Department of Regulation and Licensing to
raise funds from the general public. The articles of incorporation state that the
purpose of the (Client X) shall include:

1) To provide quality, low income housing to a diverse community of low-

income elderly individuals, and

2) To provide social and educational services to create a stable, supportive,

and safe community living environment for low income elderly individuals.

In accordance with IRS Code section 501(c)(3) the (Client X) is organized and
operates exclusively for the exempt purpose as described in Form 1023, the
application for exemption. In compliance with the restrictions on organizations
qualifying under the 501(c)3 code:

 No part of the net earnings of the organization may inure to

the benefit of any private shareholder or individual.
 No substantial part of the activities of the organization may
consist of the carrying on of propaganda or of attempting to
influence legislation (lobbying).
 The organization may not participate in, or intervene in, any
political campaign on behalf of any candidate for public office.
(Client X) is organized as a public charity under Section 509(a)(2) of the Internal
Revenue Code as an organization that normally receives:

1) no more than 1/3 of its support from gross investment income and
unrelated business taxable income (less section 511 tax) from businesses
acquired by the organization after June 30, 1975, and

2) more than 1/3 of its support from contributions, membership fees, and
gross receipts from activities related to its charitable, etc. functions.

1.02 Service Area

The primary service areas includes the surrounding Neighborhood Community.

2.00 CHART OF ACCOUNTS

2.01 Assets Contributed Revenue............41###

Program Revenue.................42###
Other Revenue.....................43###
Assets.....................................1####

Cash Accounts......................10###

Receivable Accounts............11###

Prepaid Accounts..................12###

Land & Building.....................15###

Furniture & Equipment..........16###

Other Assets.........................18###

2.05 Expenses
2.02 Liabilities

Expenses.............................5####
Liabilities.................................2####
Personnel Expenses..........50###
Current Accounts Payable....20###
Office Expenses.................51###
Accrued Payroll & Payroll
Building Expenses.............52###
Taxes Payable....................21###
*repairs & maintenance
Accrued Liabilities.................23###
*garbage & snow removal
Deferred Revenue................24###
*equipment expenses
Mortgages and Notes
Program Expenses..............53###
Payable...............................25###
Administration Expenses.....53###

Printing & Promotion............54###

2.03 Net Assets (Fund Balance)
Other Expenses...................55###

Net Assets..............................3####
2.06 Cost Centers

2.04 Revenues
Administration......................01

Fundraising..........................02
Revenues...............................4####
Building................................03
Rental Revenue....................40###
Program Services................04

Grant A................................05

Grant B................................06

(Note: Description should be provided for each account.)

3.00 ACCOUNTING PRINCIPLES & PROCEDURES

3.10 Policies

The accounting principles of (Client X) will be consistent with all applicable laws. These
include: Generally Accepted Accounting Principles, Statements of Financial Accounting
Standards Numbers 93, 116 and 117, SOP 87-2 on Joint Costs, SOP 94-2 on the
applicability of the accounting rules to nonprofits, and SOP 98-3 on accounting for
federal awards.

Certain procedures resulting from these accounting pronouncements and releases are
discussed below.

3.20 Procedures

3.21 Revenue Recognition

Contributions will be recorded as revenue in the period received or the period in

which a pledge is received. Any pledges receivable will be closely reviewed each
month to determine whether the amount is still collectible and whether the
balance of the pledges receivable is adequately reserved with the allowance for
doubtful pledges.

Rents will be recognized in the period for which the rent is paid. Any rents
receivable will be reviewed monthly to determine if the amounts are collectible
and to review what collection actions are being taken.

Grants which are classified as exchange transactions with the grantor will be
recognized as revenue when the grant money is earned. This will generally be
determined by the costs reportable to the grantor. Each restricted grant will be
set up as a separate cost center to allow for accurate and consistent recording of
the expenses of each grant.

3.22 Matching of Revenues and Expenses

In order to present accurate and consistent financial statements, the revenues

and expenses attributable to each period will be reflected in that period to the
degree possible. The Chapters on month and year end procedures review this in
greater detail. Generally, all entries required to accurately reflect the revenues
and expenses of each period will be made in that period.

The organization records transactions on the accrual basis of accounting.

3.23 Fixed Assets and Depreciation

The general capitalization policy is that all equipment and other fixed assets
costing in excess of $1,000 will be recorded as an asset. To determine if a repair
or improvement will need to be capitalized, the following additional factor needs to
be considered: does the expenditure extend the useful life of the asset repaired
or improved? For example painting would not be capitalized, but replacing the
boiler or repairing the roof would be capitalized, if the dollar value was in excess
of $1,000.
All capital assets will be depreciated over their estimated useful lives. The
straight line basis will be used, with depreciation charged beginning in the month
that the asset is placed in service. Some sample estimated lives are:

Computers and related equipment -- 3 years

Office furniture -- 5 years

Building and building

improvements -- 40 years

Parking lot and landscaping -- 10 years

All capital assets purchased with grant or other restricted funds will be cataloged.

See Section 21 for property and equipment inventory and management.

3.24 Donated Materials and Services

Generally donated materials, assets and services will not be recorded in the
accounting records.

In order to comply with the rules of SFAS 116, certain services would be recorded
as revenues and expenses. Such services would be those professional services
which we would otherwise have paid for which were provided by a person whose
work would normally include providing those services.

Any donated assets which would meet the definition to be capitalized, outlined in
Section 3.23, will be recorded as revenue and as a fixed asset.

3.25 Data Cutoff

In order to meet the deadlines for producing reports discussed in Section 7 & 8,
the gathering of information to use in making the month end entries must be cutoff
by a certain date.

The monthly financial statements are due to the Board by three weeks after the
month end. For these reports a cutoff of two weeks will be used. Any payables
or other information not available by two weeks after a month end will be
classified in the next period. The Accountant may need to use estimates if final
information is not available on a significant additional transaction.

The year end financial statements are due to the Board six weeks after year end.
For these reports a cutoff of four weeks will be used. Since the year end is the
most important period cutoff, the general ledger will continue to be held open for
 additional material transactions through the conclusion of the financial audit
fieldwork.

4.00 CASH DISBURSEMENTS

4.10 Policies

The positions authorized to sign checks are; Executive Director, Board President, Board
Vice-President and Board Treasurer. Only one signature will be required on checks.
Anyone signing a check must review and initial the supporting invoice or other
documentation. Individuals may not sign a check payable to themselves.

The Accountant will maintain the accounts payable system. Prior to payment, the
Accountant will code each invoice, prepare the checks and organize the documentation.

The Accountant will determine payroll amounts based on timesheets and authorized
rates. The Accountant will prepare the payroll checks.

4.20 Procedures

4.21 Capital Acquisitions

Three bids are required for the purchase of budgeted capital assets in excess of
$2,000, if practical. The Executive Director selects a bidder. Board approval is
required if the low bidder is not selected, or if bidding was not deemed practical
by the Executive Director. Any capital assets not budgeted by the Board must be
approved by the Board prior to soliciting bids.

4.22 Supplies, Services, and Other Invoices

Purchase requisitions may be generated by anyone in the office. The requisitions

are turned in to the Executive Director for approval and given to the office
assistant for order placement. The approved purchase requisitions are given to
the Accountant and filed in the open order file.

When the goods or services are received, the Accountant pulls the purchase
requisition and compares the order received to the packing slip and the purchase
requisition for accuracy. The packing slip is attached to the purchase requisition
and returned to the open order file until the invoice is received.

Mail is received and opened by the office assistant. All invoices are routed to the
Accountant, who matches the invoice to the approved purchase requisition and
the packing slip and determines an account coding for the transaction. The
Accountant gives the invoice and support documentation to the Executive Director
for approval to pay. The Executive Director initials the invoice indicating approval
to pay, and approving the expense account coding proposed by Accountant. The
Accountant enters the approved invoice into the A/P computer module and files
all documents in the open invoice file until they are paid.

4.23 Invoice Payment Procedures

Invoices are paid on the 1st and the 15th of each month. Prior to generating
checks, a pre-check report is generated which lists all outstanding payables with
the due dates and amounts. The Accountant will indicate which invoices need to
be paid. This pre-check report will be reviewed and approved by the Executive
Director. Based on the approved pre-check report, the checks are printed from
the A/P computer module, attached to the approved support documentation from
the open invoice file, and given to the Executive Director for signature. The
checks are sealed in envelopes by the check signer and the support documents
are returned to the Accountant to be filed alphabetically by vendor.

4.24 Payroll Procedures

Payroll is processed semi-monthly and is run and distributed by the 19th and 4th
of each month. The Executive Director forwards approved timesheets to the
Accountant at the end of each period. Each timesheet must be signed by the
employee and by the Executive Director. The Accountant totals up the
timesheets and enters the totals into the computer payroll module. The checks
are printed and presented to the Executive Director for review and signature. The
pay rates used to prepare payroll will be based on signed memos from the
Executive Director. The salary for the Executive Director will be based on a
signed memo from the Board President.
5.00 CASH RECEIPTS

5.10 Policies

The Office Assistant will receive and open the mail in the presence of program person A
in order to maintain dual control over receipts.

The Office Assistant will restrictively endorse all checks when received.

The bank deposit will be made daily by the Office Assistant.

If the Office Assistant is unavailable to perform these duties, the Executive Director will
assign an employee other than the Accountant to carry them out.

Pre-numbered receipts will be used for any monies received directly from an individual.

5.20 Procedures

All checks are restrictively endorsed, photocopied and entered onto a daily cash receipts
log when the mail is opened.

Both the Office Assistant and program person A will sign the cash receipts log verifying
its accuracy.

Payments made in person will be added to the cash receipts log. A photocopy of these
checks and a copy of the pre-numbered receipt will be attached to the daily cash
receipts log. The cash receipts log is totaled by the Office Assistant. A copy of the log is
given with the check copies to the Accountant. A copy of the log is also given to
program person B, for updating the property management software.

The Executive Director will use the original of the cash receipts log for review and to
assist in their duty of reviewing the bank statements (see Section 6).

The Accountant will use the copy of the cash receipts log and the check copies to
determine account coding and to enter the cash receipts into the computer.
6.00 BANK RECONCILIATION

6.10 Policies

The bank statements are forwarded to the Executive Director unopened.

Upon opening the statements, the Executive Director reviews the checks for unusual
items or changes. The Executive Director compares selected deposits on the bank
statement to the copy of cash receipts logs and reviews any account transfers.

The bank statements are to be reconciled by the Accountant on a monthly basis no more
than one week after receipt of the statement. The general ledger and the reconciled
bank statements will be adjusted to agree monthly.

6.20 Procedures

Upon receiving the bank statement from the Executive Director, the Accountant prepares
the monthly bank reconciliation. See Section 18 for the form used to prepare the bank
reconciliation. The bank reconciliations will reconcile the bank balance to the general
ledger balance. A journal entry will need to be posted each month for items on the bank
statements which are not already recorded in the general ledger. These reconciling
items may include: interest earned, service charges, NSF checks, direct deposits and
other debit or credit memos.

After the general ledger is reconciled to the bank statement, the monthly bank statement
and cancelled checks and other forms and the actual reconciliation form are filed in the
bank reconciliation file.
7.00 END OF MONTH ACCOUNTING PROCEDURES

7.10 Policies

The Accountant prepares the monthly financial statements

The Executive Director approves the financial statements before being sent to the Board
of Directors. The financial statements should be to the Executive Director at least two
days prior to the mailing of Board packets in order to facilitate this review.

The Board of Directors approves the monthly financial statements.

7.20 Procedures

The cutoff for information in the monthly statements is two weeks after the month end.

Upon completion of the monthly bank reconciliations, the Accountant will formulate the
monthly journal entries. There are two types of monthly journal entries, those that
remain consistent from month to month (recurring) and those that are specific to that
month. The recurring journal entries (Section 18) are determined after the annual audit
with the help of the CPA firm. These include depreciation and expensing of prepaid
insurance. The specific journal entries include recording of principal/interest breakdown
for the mortgage payment, interest and dividend income, bank transfers, NSF checks,
bank charges, accrued wages and payroll taxes, receivables, etc.

The Accountant will maintain a file for each month which includes workpapers which
document the balance of each balance sheet account. The file will also include copies
of the grant billings. All balance sheet accounts will be reconciled monthly to help
ensure that accurate statements are provided to management and the Board.

Once the final general journal entries are posted, the monthly financial statement is
printed along with a copy of the general ledger for that month as well as the general
journal entries posted.

The adjusted financial statements are to be delivered to the Board of Directors within
three weeks after the end of the month.

The Accountant prepares a budget to actual expense report for the Executive Director
and the Board of Directors to be included with the monthly financial statements.

The year end financial statements will be delayed for additional procedures (see Section
8.0).

8.00 END OF YEAR ACCOUNTING PROCEDURES

8.10 Policies
The Accountant prepares the year end financial statements.

The Accountant is responsible for preparing for the annual financial audit and for working
with the outside accountants to complete the audit.

The Executive Director approves the financial statements before being sent to the Board
of Directors. The financial statements should be to the Executive Director at least one
week prior to the mailing of the Board packet in order to facilitate this review.

The Board of Directors approves the year end financial statements.

The Accountant will arrange to move all records from the year which is closing to
storage.

8.20 Procedures

The cutoff for December financial statements is extended to four weeks after year end.

Upon completion of the December financial statements, the preliminary year end report
is run by the Accountant and given to the Executive Director for review.

The Accountant calculates the recurring entries (with the help of the CPA firm if needed)
for the new year.

8.21 Financial Audit

The Accountant will contact the independent accountants as soon as the

Executive Director signs the audit engagement letter to begin planning the
scheduling and work needed to complete the audit. The Accountant will ensure
that adequate space is provided for the independent accountants to work in our
offices. This would include one or more large tables, space to keep our records
provided to the independent accountants, light and electrical outlets.

The Accountant will work with the independent accountants to determine what
confirmations will be required. This process will be completed as soon after year
end as possible. The Accountant will oversee typing the confirmations. The
Executive Director will sign the confirmations. The Accountant will mail the
confirmations to the independent auditors.

The Accountant will be responsible for preparing as many of the schedules which
the auditors will use as possible. The completed monthly reconciliations for
December will partially fulfill this requirement.

Some of the information which needs to be organized and made available

includes: the complete general ledger for the year, a chart of accounts, all bank
statements and cancelled checks, all paid invoices, all cash receipts logs, all
payroll records, including timesheets, payroll summaries for each pay period,
941s, UC-101s and W-2s, Board minutes for the year under audit through the
 most recent minutes available, grant contract files, printouts of the donor
database, including all restricted donations, lease agreements, insurance policies,
documentation for fixed assets capitalized and documentation for donated
services or donated assets recorded in the general ledger.

The Accountant will be available at all times throughout the audit to facilitate the
work of the independent accountants. The Executive Director will schedule some
time to meet with the independent accountants as needed during the audit. The
Office Assistant will also be available for any work which the Accountant may
delegate to them.

The Accountant and Executive Director will plan a meeting with the independent
accountants at the end of the audit to discuss any issues raised, review the audit
journal entries, evaluate the audit process and plan improvements for the
following year.

9.00 COST ALLOCATIONS

9.10 Policies

(Client X) is required to follow various guidelines for allocating costs which benefit more
than one program or grant. A cost allocation plan will be adopted each year which
satisfies the requirements of all grants for that year. This cost allocation plan will need to
be modified any time a new program is started or at the end or beginning of any fiscal
year grants. Due to the frequent modifications to the cost allocation plan, it will be
maintained outside of this accounting procedures manual (see Exhibit A).
10.00 INVESTMENTS

10.10 Policies

Cash not needed for immediate working capital will be transferred to interest bearing
investments, unless the funds are designated for a particular account.

(Client X) will maintain collateralization of the total at any one bank in excess of the
FDIC coverage. If this is not deemed to be practical or cost effective, a second bank will
be used.

The Board of Directors must approve any investments beyond the options listed below.

10.20 Procedures

(Client X) will maintain a money market account at the same bank where the checking
account is maintained. Certificates of deposit may also be used to invest excess cash.
The Executive Director will initiate the transfer of funds or setting up new certificates of
deposit based on the projected cash flow requirements and budgets of (Client X). The
Accountant will prepare the projected cash flow requirements as requested by the
Executive Director.

The operating reserve fund and any cash designated by the Board will be maintained in
a money market account or certificate of deposit. The Board will specify the investment
method for the operating reserve and for each designated fund, so that the timeline of
the investment will match the timeline of the reserve or designation.
11.00 DEBT

11.10 Policies

Board approval is required for incurring any debt of (Client X) other than operating trade
payables and budgeted payroll payables. The Executive Director will be authorized to
negotiate such debt as needed by the Board of Directors.

Any loan covenants and restrictions will be reported to the Board when the debt is
authorized. The Accountant will periodically review these covenants and report to the
Executive Director if there are any violations or potential violations of the covenants.

11.20 Procedures

The Executive Director and Board President or Treasurer will sign any debt agreements
after receiving full Board approval.

The Accountant will reconcile the general ledger debt balances to statements or
amortization schedules each month. In addition, accrued interest will be recorded in the
general ledger as needed.

12.00 RESERVES AND DESIGNATED FUNDS

12.10 Policies

(Client X) will build and maintain an operating reserve to assist in maintaining financial
stability. The target for the operating reserve will be six months of general operating
expenses. This will be a cash reserve held separately from other funds of (Client X).
The reserve may be invested consistent with the investment policy of (Client X). Any
income of the reserve fund will stay in the reserve fund.

The Board of Directors may designate portions of the net assets of (Client X) for specific
purposes.

12.20 Procedures

During the annual budget preparation, the Board will review the operating reserve and
set a target for funds to be set aside that year. The Executive Director will establish and
maintain the operating reserve bank account as directed by the Board.

Designation of net assets will be made by resolution of the Board. A purpose and
timeline must be specified for each designated fund. The designation may also specify
whether a separate cash fund is to be used.

13.00 INTERNAL CONTROLS AND FINANCIAL AUDIT

13.10 Policies
 The review of internal controls and the annual audit are two of the most important
procedures the Board has for fulfilling its fiduciary responsibilities to (Client X).

Internal controls pertaining to the accounting records are established by the Executive
Director and Board Treasurer in consultation with the Accountant.

The Board of Directors selects the public accounting firm which will perform the year end
financial audit. The financial audit report is presented to the Board of Directors who has
the authority to approve the audit.

13.20 Procedures

Whenever there is a change in administrative personnel or a change in the operating

structure of the organization, the Treasurer and Executive Director will meet to
determine that the internal control system continues to meet the needs of (Client X). If
appropriate, the changes will be reflected in this accounting procedures manual.

The key features of the internal control system are that the Accountant and program
person B, who maintains the property management software, are not involved in
handling checks and cash received, signing checks, transferring money or establishing
cash accounts or investments and do not receive the unopened bank statement. The
other aspect of this is that the Accountant reviews the transactions of the other
employees and is responsible for noting any problems to the Executive Director or
directly to the Board Treasurer or President.

The Board of Directors will approve, as part of the budget process, the public accounting
firm to perform the annual audit.

The Board Treasurer will attend the audit exit conference at the conclusion of the audit.
The public accounting firm will present the audit to the Board each year. The Board will
review and approve the financial audit.

The Accountant and Executive Director will be responsible for scheduling the audit,
preparing the information needed by the auditors and answering questions during the
audit.

14.00 COMPLIANCE

14.10 Policies

In order to continue receiving government grants and restricted donations, (Client X)

must have systems in place to ensure compliance with the restrictions imposed by those
grants and restricted donations.

The Accountant is designated as (Client X) 's compliance officer and will be responsible
for overseeing the compliance with all applicable grant restrictions.
 The Executive Director will be responsible for communicating the nature of all donor
restrictions to the Accountant. This information will used to ensure that the General
Ledger restricted donations account will reflect the restricted donations and the spending
of those restricted amounts, as appropriate.

14.20 Procedures

14.21 Compliance Committee

A compliance committee will be chaired by the Accountant and consist of the

Executive Director and primary program personnel. The Accountant will be
responsible for discussing new compliance requirements in the grants which fund
the programs with the committee. The Accountant will be responsible for
preparing a report documenting how WH, is ensuring compliance with grant rules
in each grant program. The Accountant will also produce a similar report for
overall compliance procedures of the agency. These reports, plus any
correspondence with granting agencies regarding compliance issues, will be kept
in a central compliance file.

The compliance committee will also oversee the maintenance of grant files. The
grant files will contain the final signed copy of the grant, any addenda, and
correspondence.

14.22 Restricted Donations

The Executive Director will maintain a record of all restricted donations in the
donor database so that periodic reports of the year's cumulative restricted
donations can be produced. When a restriction has been satisfied, that will be
noted in the database. If appropriate, the Executive Director will be responsible
for communicating the satisfaction of the restriction to the donor.

The Executive Director will forward copies of each month's new and outstanding
restricted donations to the Accountant. The Accountant will create a journal entry
each month to ensure that the restricted donations are correctly presented in the
financial statements.

15.00 BUDGETING

15.10 Policies

The Board of Directors is responsible for guiding the budget process and for approval of
the annual budget.

The Executive Director and Accountant will be responsible for preparing the proposed
budget.
 15.20 Procedures

The budgeting process will begin in September for the following fiscal year. This will
allow for eight months of results to be used in planning the budget.

All budget documents will be submitted to the Accountant by September 30 for

consolidation into an overall agency budget. The Executive Director and Accountant will
then review this to determine if there are any obvious areas which may need to be
reworked. The collated budget will be submitted to the Finance Committee by October
15 for review and feedback. Any further revisions will be made and the budget
presented to the Board by November 15.

The responsibility for each area of the budget is as follows:

Executive Director -- Program revenues and expenses, fundraising revenues and

expenses, donations revenue, operations expenses, and capital budget.

Accountant -- Accounting expenses, investment income, projected balance sheet.

Board Treasurer -- Board and committee expenses.

SELF-CHECK 5.2-1
1. Question
The accounting profession can be divided into three major categories; specifically, the practice of public accounting,
private accounting, and governmental accounting. A somewhat unique and important service of public accountants
is:
a. Financial accounting.
b. Managerial accounting.
c. Auditing.
d. Cost accounting.

2. Question
The primary private sector agency that oversees external financial reporting standards is the:
a. Financial Accounting Standards Board.
b. Federal Bureau of Investigation.
c. General Accounting Office.
d. Internal Revenue Service.

3. Question
Which of the following equations properly represents a derivation of the fundamental accounting equation?
a. Assets + liabilities = owner's equity.
b. Assets = owner's equity.
c. Cash = assets.
d. Assets – liabilities = owner's equity.

4. Question
 Wilson Company owns land that cost $100,000. If a “quick sale” of the land was necessary to generate cash, the
company feels it would receive only $80,000. The company continues to report the asset on the balance sheet at
$100,000. Which of the following concepts justifies this?
a. The historical-cost principle.
b. The value is tied to objective and verifiable past transactions.
c. Neither of the above.
d. Both "a" and "b".

5. Question
Retained earnings will change over time because of several factors. Which of the following factors would explain an
increase in retained earnings?
a. Net loss.
b. Net income.
c. Dividends.
d. Investments by stockholders.

6. Question
Which of these items would be accounted for as an expense?
a. Repayment of a bank loan.
b. Dividends to stockholders.
c. The purchase of land.
d. Payment of the current period's rent.

7. Question
Which of the following transactions would have no impact on stockholders’ equity?
a. Purchase of land from the proceeds of a bank loan.
b. Dividends to stockholders.
c. Net loss.
d. Investments of cash by stockholders.

8. Question
Which of the following would not be included on a balance sheet?
a. Accounts receivable.
b. Accounts payable.
c. Sales.
d. Cash.
 Answer Key 5.2-1

1. C
2. A
3. D
4. D
5. B
6. D
7. A
8. C
 Bibliography
Websites

Wikipedia, the Free Encyclopedia. (March 2014). Internal Control Retrieved

(April 2014) from http://en.wikipedia.org/wiki/

Miley, Michelle. Seven Principles of Internal Control (n.d.), Retrieved (April

2014) from http://www.ehow.com/info_8186913

VanBaren, Jennifer. How to Write an Internal Control Procedures Manual

(n.d.), Retrieved (April 2014) from http://www.ehow.com/how_7213105

VanBaren, Jennifer. How to Check the Effectiveness of an Internal Control

(n.d.), Retrieved (April 2014) from http://www.ehow.com/how_8477923_

Internal Control Questionnaire (n.d.), Retrieved (April 2014) from

http://www.zainbooks.com/books/acounting-and-
Finance/fundamentals-of-auditing_19

Image of an Internal Control Questionnaire, Retrieved (April 2014) from

http://www.mheducation.ca/college/olcsupport/messier1/audit/intcsu
b4.html

Suggested Readings

Internal Control Presentation (December 2012)

https://internalaudit.uncc.edu/sites/internalaudit.uncc.edu/files/medi
a/docs/

Internal Control Slides http://www.csus.edu/indiv/p/pforsichh/documents/

Basle Committee on Banking Supervision (January 1998). Framework for the

Evaluation of Internal Control Systems http://www.bis.org/publ/bcbs33

Internal Control – Integrated Framework http://www.coso.org/documents/