Definition of internal control
internal control
any measure used by management to protect
assets, promote the accuracy of records, ensure adherence
to company policies, or promote operational efficiency;
the totality of all internal controls represents the
internal control system
Related Terms:
Refers to forms used and procedures
established by a business—beyond what would be required for the
record-keeping function of accounting—that are designed to prevent
errors and fraud. Two examples of internal controls are (1) requiring a
second signature by someone higher in the organization to approve a
transaction in excess of a certain dollar amount and (2) giving customers
printed receipts as proof of sale. Other examples of internal
control procedures are restricting entry and exit routes of employees,
requiring all employees to take their vacations and assigning another
person to do their jobs while they are away, surveillance cameras, surprise
counts of cash and inventory, and rotation of duties. internal controls
should be cost-effective; the cost of a control should be less than
the potential loss that is prevented. The guiding principle for designing
internal accounting controls is to deter and detect errors and dishonesty.
The best internal controls in the world cannot prevent most fraud
by high-level managers who take advantage of their positions of trust
and authority.
the additional value inherent in the control interest as contrasted to a minority interest, which reflects its power of control
an amount or percentage deducted from a pro rata share of the value of 100% of an equity interest in a business, to reflect the absence of some or all of the powers of control.
50% of the outstanding votes plus one vote.
A service that provides for a single presentation of checks each day (typically in
the early part of the day).
A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.
The corporate manager responsible for the firm's accounting activities.
Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.
Governmental restrictions on the purchase of foreign currencies by domestic citizens or
on the purchase of the local domestic currency by foreigners.
The management of a firm's costs and expenses in order to control them in relation to
budgeted amounts.
Various forms of controls imposed by a government on the purchase/sale of
foreign currencies by residents or on the purchase/sale of local currency by nonresidents.
IRR on the incremental investment from choosing a large project
instead of a smaller project.
Finance generated within a firm by retained earnings and depreciation.
Maximum rate a firm can expand without outside source of funding. Growth generated
by cash flows retained by company.
The mechanisms for issuing and trading securities within a nation, including its domestic
market and foreign market.
Compare: external market.
Internal measure
The number of days that a firm can finance operations without additional cash income.
Internal rate of return
Dollar-weighted rate of return. Discount rate at which net present value (NPV)
investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.
Internally efficient market
Operationally efficient market.
Portfolio internal rate of return
The rate of return computed by first determining the cash flows for all the
bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows
equal to the market value of the portfolio.
Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage
securities as the primary assets.
Budgetary control
The process of ensuring that actual financial results are in line with targets – see variance
analysis.
Controllable profit
The profit made by a division after deducting only those expenses that can be controlled by the
divisional manager and ignoring those expenses that are outside the divisional manager’s control.
Cost control
The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.
Internal rate of return (IRR)
A discounted cash flow technique used for investment appraisal that calculates the effective cost of capital that produces a net present value of zero from a series of future cash flows and an
initial capital investment.
Control account
An account maintained in the general ledger that holds the balance without the detail. The detail is maintained in a subsidiary ledger.
internal rate of return (IRR)
The precise discount rate that makes the
present value (PV) of the future cash returns from a capital investment
exactly equal to the initial amount of capital invested. If IRR is higher
than the company’s cost-of-capital rate, the investment is an attractive
opportunity; if less, the investment is substandard from the cost-ofcapital
point of view.
management control
This is difficult to define in a few words—indeed, an
entire chapter is devoted to the topic (Chapter 17). The essence of management
control is “keeping a close watch on everything.” Anything can
go wrong and get out of control. Management control can be thought of
as the follow-through on decisions to ensure that the actual outcomes
happen according to purposes and goals of the management decisions
that set things in motion. Managers depend on feedback control reports
that contain very detailed information. The level of detail and range of
information in these control reports is very different from the summarylevel
information reported in external income statements.
Internal Rate of Return (IRR)
The discount rate that equates the present value of the net cash
inflows with the present value of the net cash outflows
(investments). The IRR measures the profitability (rate of return) of
an investment in a project or security.
control chart
a graphical presentation of the results of a
specified activity; it indicates the upper and lower control
limits and those results that are out of control
controllable cost
a cost over which a manager has the ability to authorize incurrence or directly influence magnitude
controllable variance
the budget variance of the two variance approach to analyzing overhead variances
controller
the chief accountant (in a corporation) who is responsible
for maintaining and reporting on both the cost
and financial sets of accounts but does not handle or negotiate
changes in actual resources
controlling
the process of exerting managerial influence on
operations so that they conform to previously prepared plans
cost control system
a logical structure of formal and/or informal
activities designed to analyze and evaluate how well
expenditures are managed during a period
internal rate of return (IRR)
the expected or actual rate of
return from a project based on, respectively, the assumed
or actual cash flows; the discount rate at which the net
present value of the cash flows equals zero
management control system (MCS)
an information system that helps managers gather information about actual organizational occurrences, make comparisons against plans,
effect changes when they are necessary, and communicate
among appropriate parties; it should serve to guide organizations
in designing and implementing strategies so that
organizational goals and objectives are achieved
noncontrollable variance
the fixed overhead volume variance;
it is computed as part of the two-variance approach to overhead analysis
quality control
the implementation of all practices and policies
designed to eliminate poor quality and variability in the
production or service process; it places the primary responsibility
for quality at the source of the product or service
statistical process control (SPC)
the use of control techniques that are based on the theory that a process has natural variations in it over time, but uncommon variations
are typically the points at which the process produces "errors", which can be defective goods or poor service
Internal rate of return
a. The average annual yield earned by an investment during the period held.
b. The effective rate of interest on a loan.
c. The discount rate in discounted cash flow analysis.
d. The rate that adjusts the value of future cash receipts earned by an investment so that interest earned equals the original cost.
See Yield to maturity.
Internal rate of return
The rate of return at which the present value of a series of future
cash flows equals the present value of all associated costs. This measure is most
commonly used in capital budgeting.
controller
Officer responsible for budgeting, accounting, and auditing.
internal growth rate
Maximum rate of growth without external financing.
internal rate of return (IRR)
Discount rate at which project NPV = 0.
internally generated funds
Cash reinvested in the firm; depreciation plus earnings not paid out as dividends.
Wage/Price Controls
An incomes policy in which wages and prices are constrained by law not to rise by more than a specified percentage.
Immigration Reform and Control Act of 1986
A federal Act requiring all employers having at least four employees to verify the identity and employment
eligibility of all regular, temporary, casual, and student employees.
Internal Revenue Code
Refers to all federal tax laws as a group.
Internal Revenue Service
A federal agency empowered by Congress to interpret and enforce tax-related laws.
Configuration control
Verifying that a delivered product matches authorizing
engineering documentation. This also refers to engineering changes made subsequent
to the initial product release.
Cutoff control
A procedure for ensuring that transaction processing is completed
before the commencement of cycle counting.
Shelf life control
Deliberate usage of the oldest items first, in order to avoid exceeding
a component or product’s shelf life.
Visual control
The visual inspection of inventory levels, enabled by the use of
designated locations and standard containers.
financial reports and statements
Financial means having to do with
money and economic wealth. Statement means a formal presentation.
Financial reports are printed and a copy is sent to each owner and each
major lender of the business. Most public corporations make their financial
reports available on a web site, so all or part of the financial report
can be downloaded by anyone. Businesses prepare three primary financial
statements: the statement of financial condition, or balance sheet;
the statement of cash flows; and the income statement. These three key
financial statements constitute the core of the periodic financial reports
that are distributed outside a business to its shareowners and lenders.
Financial reports also include footnotes to the financial statements and
much other information. Financial statements are prepared according to
generally accepted accounting principles (GAAP), which are the authoritative
rules that govern the measurement of net income and the reporting
of profit-making activities, financial condition, and cash flows.
internal financial statements, although based on the same profit
accounting methods, report more information to managers for decision
making and control. Sometimes, financial statements are called simply
financials.
failure cost
a quality control cost associated with goods or
services that have been found not to conform or perform
to the required standards as well as all related costs (such
as that of the complaint department); it may be internal or
external
flexible manufacturing system (FMS)
a production system in which a single factory manufactures numerous variations
of products through the use of computer-controlled
robots
focused factory arrangement
an arrangement in which a
vendor (which may be an external party or an internal corporate
division) agrees to provide a limited number of
products according to specifications or to perform a limited
number of unique services to a company that is typically
operating on a just-in-time system
Foreign Corrupt Practices Act (FCPA)
a law passed by U.S. Congress in 1977 that makes it illegal for a U.S. company to engage in various “questionable” foreign payments and
makes it mandatory for a U.S. company to maintain accurate
accounting records and a reasonable system of internal
control
management information system (MIS)
a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
alternative situations
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