Internal Control
Internal controls are the policies and procedures management uses to protect the organization’s assets and to ensure the accuracy and reliability of accounting records. They also work to maintain efficient operations and compliance with management’s policies. The internal control structure consists of three elements:
- the control environment,
- the accounting system, and
- control procedures.
Examples of control procedures are:
- proper authorization of transactions
- recording transactions of facilitate preparation of financial statements and to establish accountability for assets
- use of well-designed documents and records
- limited access to assets
- periodic independent comparison of records and assets
- separation of duties into the functions of authorization, operations, custody of assets, and recordkeeping
- use of sound personnel policies
A system of internal control relies on the people who implement it. Thus, the effectiveness of internal control is limited by the people involved. Human error, collusion, the interference of management, and the failure to recognize changed conditions all can contribute to a system’s failure.
Certain procedures strengthen internal control over sales, cash receipts, purchases, and cash disbursements.
First, the functions of authorization, recordkeeping, and custody should be kept separate.
Second, the accounting system should provide for physical protection of assets (especially cash and merchandise inventory), use of banking services, prompt recording and deposit of cash receipts, and payments by check.
Third, the people who have access to cash receipts and merchandise inventory should be specifically designated and the number limited.
Fourth, employees who have access to cash or merchandise inventory should be bonded.
Fifth, the Cash account should reconciled each month, and surprise audits of cash on hand should be made by an individual who does not authorize, handle, or record cash transactions.