Internal Control Definition
– Internal controls are systems and procedures designed to ensure that all employees perform their duties ethically, honestly and to ensure the continued reliability of the accounting system.
Why does a company have internal controls?
– The company needs effective controls to:-
1. Conduct business in an orderly and efficient manner.
2. Safeguard its assets and resources.
3. Prevent and detect errors and fraud.
4. Protect the interests of the staff.
5. Help ensure the accuracy of accounting records.
• The internal control procedures include the following:-
1. Segregation of duties
– segregation of duties is an internal control designed to reduce error and fraud by ensuring that at least two individuals are responsible for the separate parts of a task.
For example:-
– The sales order clerk will receive an order, but the sales manager has to authorise the sale before the clerk can process/record the order.
2. Access Control
– Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs to keep unauthorised users from accessing the system.
For example:-
– The cashier uses a username and password to gain access to the till.
3. Reconciliations
– The balance of the cash receipts and payments journal could be incorrect if it is not regularly compared and reconciled to the balance on the balance statement.
4. Physical audits
– Physically checking of cash inventory and/or assets to prevent any well hidden discrepancies.
Examples:
– Check purchase cards against source documents
An incorrect number of goods could be received if a supplier delivers to a company and the receiving clerk does not count the goods and sign the supplier’s delivery note.
– The clerk could not be held responsible and the mistake could be repeated.
– Checking management reports against source documents.
5. Approval and authorisation
For example: Credit sales could be made to customers who are not credit worthy and who cannot pay their accounts, if the credit sale is not approved by the credit controller first.
6. Documentation
– Using standard document format to maintain consistency in record keeping to make it easier to review past records for the source of a discrepancy in the system.
7. Trial Balances
– Using a double entry system to ensure that books are always balanced. The trial balance should be prepared as frequently as possible to ensure that any discrepancies are investigated.
8. Keeping your ATM/debit card pin number separate from your card.
9. Reviewing bills and credit card statements before paying them.
10. Do not leave blank cheques or cash lying around.
11. Computer passwords are periodically changed and should not be written down or kept by the PC.
12. Locking cash drawers and securing storage of cheques.
