Quiz 7: Internal Control and Cash


Day's cash on hand is a tool to analyze how long a company can survive when flow of cash is reducing significantly. A higher number of days cash in hand shows higher liquidity and thus favorable for creditors, but a very high number of days cash in hand shows inefficient management of cash. On the other hand very small days cash in hand show weak liquidity of the company. A. Day's cash on hand is calculated by using the following formula: img Calculation of days cash on hand img Note: Calculation of daily cash operating expenses: img Therefore, Days cash on hand of A Company is img and of N Company is img . B. Interpretation : Looking to the Day's cash result, it can be conclude that N Company has more funds to meet its expenses as compared to that of A Company. Because N Company has total 251.4 day's cash on hand available with it whereas the A Company has only of 63.2 days. Therefore, N Company has more funds to meet its expenses.

Control Environment refers to the perception of the management and employees towards the significance of the control. Management's emphasis on internal control should be optimum. Control procedure is a key element of internal control. Control procedure can assure achievement of business goal. Control procedure is important in preventing fraud.Monitoring is used to find out weakness in the system and to improve the weak area. Internal auditors are responsible for day to day monitoring. On the basis of elements, the following can be identified as types of internal control. 1. Employment of external auditors to assess the suitability of control is an element of monitoring. This is because the external auditors estimate and report on in-house control as a part of their annual audit. 2. Personnel policies is an element of control environment. This is because these policies are concerned about the attitude of the employees and managers regarding the significance of control. 3. Maintenance of inventory in a locked warehouse is an element of control procedure. This is because they are the security and safety measures taken in order to protect assets.

Internal Control are the policies, rules and regulations set up by an organisation to protect its assets, reducing errors, ensuring truthfulness of financial and accounting information, and prevention of frauds in the organisation. It also ensures operational efficiency by improving the timeliness and accuracy of financial reports of the organisation. (a) The five elements of internal control are as follows: 1. Control environment- It is the foundation for other four component of internal control. It sets the tone of the organisation at top level. It also provides discipline and structure. The three major factors that influences control environment of a company is the philosophy of its management and its operating style, its organisational structure, and its personnel policies. 2. Risk assessment- The identification and analysing of the potential risk should be done which prevents the company to achieve its objective. With the proper identification, a company will be able to alleviate and manage the risk. 3. Control procedures- The control procedures are set in order to ensure that the company can achieve its objective. 4. Monitoring- The top management is held responsible for the internal control monitoring and govern if they are operating as they are supposed to. If not, the management is held responsible to modify it. 5. Information and communication- It is the exchange of information within the business. The clear communication should flow not just from management to employee but also other way around. Also, the access of confidential information should be to authorized persons. (b) No, it is not true that one element of internal control is of more importance than another as all elements are interrelated to each other. Also, in order to ensure proper internal control all elements must be achieved.