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Chapter 12 – Administrative Processes and Controls
Instructor Manual
➢ Introduction to Administrative Processes. Administrative processes are
transactions and activities that either are specifically authorized by top managers or
are used by managers to perform administrative functions. Raising capital funds or
➢ Source of Capital Processes. Capital is the funds used to acquire the long-term,
capital assets which are required to run the business. Capital usually comes from
long-term debt or equity. Long-term debt is typically loans or bonds payable, while
equity is the issuance of common or preferred stock. The transactions and resulting
➢ Investment Processes. Investment processes authorize, execute, manage, and
properly account for investments of excess funds. The stewardship obligation
suggests that if funds on hand exceed the company’s operating needs, then they
➢ Risks and Controls in Capital and Investment Processes. For both source of
capital processes and investment processes, the important control is the specific
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➢ General Ledger Processes. The general ledger contains data that originated in
each of the processes described in previous chapters as well as the capital and
investment processes described in this chapter. As business events occur, any
regular, recurring transaction will be recorded in a special journal and subsidiary
➢ Risks and Controls in General Ledger Processes. The following are common
internal control procedures associated with general ledger processes:
○ Authorization of Transactions. Summaries of special journals and subsidiary
ledgers should not occur without being authorized by a designated person. In
manual systems and less complex computerized systems, the authorization to
post is vested in the journal voucher. In computerized environments, controlled
○ Segregation of Duties. Employees who post journal vouchers have record
keeping responsibility; therefore, in order to maintain proper segregation of
duties, they should not perform authorization or custody functions such as
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eventually post to the general ledger should still be segregated. Segregation can
be built into employees’ user profiles.
○ Adequate Records and Documents. A well-defined chart of accounts is
necessary for adequate record keeping within the general ledger processes. To
○ Security of the General Ledger and Documents. In manual systems, the
general ledger and supporting documents must be protected from unauthorized
access. IT accounting systems protect record access electronically through the
use of user IDs, passwords, and resource authority tables.
○ Independent Checks and Reconciliations. In manual systems, the
reconciliation of special journals and subsidiary ledgers to the general ledger
➢ Reporting as an Output of the General Ledger Processes. The information in the
general ledger provides important feedback for managers as well as for external
parties such as investors and creditors.
○ External Reporting. All amounts reported in the basic financial statements are
derived from general ledger account balances. Usually, accounts are combined
and summarized when reported in general purpose financial statements because
external users do not need detailed balance information on every account. IT
accounting systems are programmed to combine accounts when the system
processes the financial statements.
○ Internal Reporting. Internal reports tend to vary greatly, as they are tailored to
the specific needs of each management level and function. The type of report
depends upon the following factors:
• Type of business organization. Manufacturing entities, retail firms, service
➢ Ethical Issues Related to Administrative Processes and Reporting. Unethical
behavior that may occur in administrative processing is likely to be the result of
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related assets and documents or they are limited by the small number of
transactions that take place. Also, administrative processes are tightly controlled and
supervised by top management, as they tend to require specific authorization.
o Unethical Management Behavior in Capital Sources and Investing. When
raising capital, it is imperative that investors and creditors be given honest and
o Internal Reporting Ethical Issues. The manner in which management uses
internal reports can set either a proper ethical tone or an improper one. When
management places heavy emphasis on profitability, the result may be unethical
behavior such as manipulating numbers in order to show a higher profit. To set a
proper ethical tone, top management should measure several factors of
➢ Corporate Governance in Administrative Processes and Reporting. The
processes described in this chapter are part of a corporate governance structure.
When management designs and implements administrative processes, it assigns
responsibility for executing the related capital, investment, and general ledger
functions to various employees. It must be mindful of the risks of stolen or misused
Since financing and investing transactions that are included in the administrative
processes are concerned with proper use of cash, and since cash is particularly
susceptible to theft, financial stewardship is especially important. Establishing and
monitoring budgets are one method of exercising financial stewardship over