Identify internal control principles.

(SO 2), C
The internal control procedures in Phillips Company make the following provisions. Identify the principles of internal control that are being followed in each case.
a. Employees who have physical custody of assets do not have access to the accounting records.
b. Each month the assets on hand are compared to the accounting records by an internal auditor.
c. A prenumbered shipping document is prepared for each shipment of goods to customers

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To identify the internal control principles being followed in each case, we can refer to the five main components of internal control identified by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. These components are:

1. Control Environment: This refers to the overall attitude and actions of management regarding the importance of internal control. It sets the tone for the organization and influences the control consciousness of its employees.

2. Risk Assessment: This involves identifying and assessing the risks that may prevent the achievement of an organization's objectives. It helps in determining the necessary controls to mitigate those risks.

3. Control Activities: These are the specific policies and procedures implemented by an organization to ensure that its objectives are achieved. Control activities serve as the backbone of internal control system and can include various principles.

Now, let's apply these principles to the control provisions mentioned in each case:

a. Employees who have physical custody of assets do not have access to the accounting records.

This provision aligns with the principle of segregation of duties, which ensures that no one individual has control over all aspects of a transaction or asset. By separating the custody of assets from access to accounting records, it reduces the risk of fraudulent activities, unauthorized transactions, and errors.

b. Each month, the assets on hand are compared to the accounting records by an internal auditor.

This provision relates to the principle of monitoring. Regular comparison of physical assets to accounting records by an internal auditor helps to identify discrepancies, errors, or potential fraudulent activities. Monitoring internal control activities ensures that they are functioning effectively and any issues are promptly addressed.

c. A prenumbered shipping document is prepared for each shipment of goods to customers.

This provision represents the principle of documentation. Prenumbered shipping documents create a clear trail of transactions and activities. This helps in tracking the movement of goods, verifying the accuracy of shipments, and ensuring that all transactions are properly recorded.

In summary, the control provisions mentioned in the question align with the principles of segregation of duties, monitoring, and documentation, which are essential components of a strong internal control system.