Businesses

Articles

Home Auto Family Finance Health & Beauty House & Home Insurance Legal Pets Professional Services School & Work Seasonal Shopping & Fun Sports & Fitness Vacations & Travel
Internal Controls in Accounting

Internal Controls in Accounting

https://spag.es/2gJ9HkA

Share with friends

×

In accounting, internal controls are the measures put into place to ensure that operations are effective, efficient, and in full compliance with all applicable laws and regulations. Internal controls also safeguard a company’s assets against theft as well as unauthorized use, acquisition, or disposal.

In order for internal controls to be effective, the upper-level managers of a business must establish a proper control environment. This means that the internal control policy and procedures are clearly defined and followed. A control environment includes independent oversight, either from the board of directors or from an audit committee. The integrity, ethical values, and philosophy of management should be readily transparent and above board. The company should have a well defined organizational structure, with employees that are competent and trustworthy.

With the control environment in place, management can then implement its internal controls. While the specifics may vary from business to business, there are some internal controls that are widely used.

  • Segregation of Duties: Employees should be assigned responsibility for separate components of related tasks, especially those involving recordkeeping, custody, or authorization. For example, the employee who administers the physical control of an asset should not be responsible for that asset’s recordkeeping.
  • Proper Authorization: By requiring proper authorization of activities and transactions, management can ensure that these activities adhere to established guidelines. To deviate from policy and pursue an alternate course of action would require further authorization from a responsible manager. For example, a company might implement a fixed price list to serve as the official authorization for a large sales staff. If employees wish to deviate from the price list, they must obtain authorization from a sales manager.
  • Sufficient Documentation: With proper documents and records, a company can readily provide evidence that its financial statements are complete and accurate. Internal controls related to sufficient documentation include the creation of invoices, the use of consecutively pre-numbered documents, and deadlines to ensure that documents are prepared in a timely manner.
  • Physical Control: These internal controls are in place to protect the company’s assets. Mechanical measures (such as locks, fences, employee ID cards, safes, or fireproof file cabinets) can protect the assets from physical theft or damage. Computer security measures (such as network access privileges or backup/recovery schedules) can protect electronic data from tampering, theft, or accidental deletion.
  • Independent Verification: To ensure the reliability of accounting information and the efficiency of operations, an employee’s duties should be verified by others who did not do the work themselves. For example, a supervisor verifies the accuracy of a cashier’s drawer at the end of each work day, while internal auditors may verify that the supervisor’s count is accurate. When combined with segregation of duties, independent verification creates a system of checks and balances within the internal controls.
https://spag.es/2gJ9HkA

Share with friends

×