Major Internal Control
Length: 1240 words (3.5 double-spaced pages)
1. Administrative control comprises the plan of organization and all methods and procedures that facilitate management planning and control. Examples are departmental budgeting procedures and reports on performance.
2. Accounting control comprises the methods and procedures that are mainly concerned with the authorization of transactions, the safeguarding of assets, and the accuracy of the financial records. Good accounting controls help maximize efficiency; they help minimize waste, unintentional errors, and fraud.
There are five key elements of internal control: environmental control, risk assessment, control procedures, monitoring and information and communication. Each area contributes an essential part of the control system in accounting information system as a whole, and without all of the key elements present, the controls and control system doesn’t work.
The environmental control refers to management and employee attitude and behavior.
The goals and objectives of management will affect employee behavior and attitude throughout a business. For example, the goal and objective of the management is to achieve certain sales levels at all costs, this will discourages employees to adhere to the internal controls in place and encourages achievement of what management wants, never mind the consequence. So, to ensure employees adhere to internal control, the goals and objectives of management must communicate well and clearly to them. As a result, human resources department will then provide much of the input for effective environmental control.
Risk assessment incorporates a businesses ability to analyze business risks, estimate their importance and react or act accordingly. Risk assessment is generally a managerial function, but can be included in a day to day analysis by employees, if the work environment includes risks and dangers.
The next element, the control procedures simply provides the stated methods for carrying out the environmental controls, the risk assessment, the monitoring, and the information communication that must take place in the internal control process. In order to decrease the potential for fraud, inadequately trained personnel, and eliminate process error, control procedures benefit the company, the management, and the employee of a business. Control procedures greatly affect the information and communication aspect of the business, in that so much of the communication of the state of the business is dependent upon the information furnished by each department. The checks and balances that the control procedures provide assures a business that each department will provide timely and honest as well as accurate and useful information.
1. Reliable personnel with clear responsibilities. The most important element of successful control is personnel. Incompetent or dishonest individuals can undermine a system, no matter how well it meets the other items on the check list. Individuals obviously must be given authority, responsibility and reliability. Yet many employers use low-cost talent that may prove exceedingly expensive in the long run, not only because of fraud but because of poor productivity.
Reliability begins at the top of the organization. The entire system deserves surveillance by operating management to see if it is working as prescribed and if changes are warranted. In addition, appropriate overseeing and appraisal of employees are essential; the most streamlined accounting system is deficient if its prescribed procedures are not being conscientiously followed.
2. Separation of Duties: This element not only helps ensure accurate compilation of data but also limit the chances for fraud that would require the collusion of two or more persons. This extremely important and often neglected element can be subdivided into four parts:
a. Separation of operational responsibility from record-keeping responsibility. The entire accounting function should be divorced from operating departments.
b. Separation of the custody of assets from accounting. This practice reduces temptation and fraud. For example, the book keeper should not handle cash, and the cashier should not have access to ledger accounts such as the individual records of customer.
In a computer system, a person with custody of assets should not have access to programming to any input records. Similarly, an individual who handles programming or input records should not have access to tempting assets.
c. Separation of the authorization of transactions from the custody to related assets. To the extent of feasible, persons who authorize transactions from its origin to its ultimate posting in a ledger. Independent performance of various phases will help ensure control over errors.
d. Separation of duties within the accounting functions: An employee should not be able to record a transaction from its origin to its ultimate posting in a ledger. Independent performance of various phases will help ensure control over errors.
3. Proper Authorization:
General authorization is usually found in writing. If often sets definite limits on what costs to charge, on what price to charge, on what credit limits to grant to customers, and so forth.
Specific authorization usually means that a superior manager must permit authorization. For example, the plant manager, rather than the supervisor, may have to approve overtime. Another example is the need for approval from the board of directors regarding expenditures for capital assets in excess of a specific limit.
4. Adequate Documents: Documents and records vary considerably, from source documents like sales invoice and purchase orders to journals and ledgers. Immediate, complete and temper proof recording is the aim. It is encouraged by having all source documents renumbered and accounted for, by using devices such as cash register and locked compartments in invoice-writing machines, and by designing forms for ease of recording. Immediate recording is especially important for handling cash.
5. Proper Procedures: Most organization have procedure manuals, which specify the flow of documents and provide information and instruction to facilitate adequate record keeping. Routine and automatic checks are major ways of attaining proper procedures. In a phrase, this means doing things "by the numbers". Just as manufacturing activities tend to be made more efficient by the division and specialization of repetitive activities, so can record keeping activities be made less costly and more accurate.
6. Physical Safeguards: Obviously, losses of cash, inventories, and records are minimized by safe, locks, watchmen, and limited access.
7. Bonding, Vacations and Rotation of Duties: Key people may be subject to excessive temptation, top executives, branch managers, and individuals who handle cash or inventories should have understudies, be forced to take vacations, and be bonded. Incidentally, the act of bonding that is buying insurance against embezzlement, is not a substitute for vacations, rotation of duties, and similar precautions. Insurance companies will pay only when a loss is proven, establishing proof is often difficult and costly in itself.
8. Independent Check: All phases of the system should be subjected to periodic review by outsiders (for example, by external auditors) and by internal auditors who do not ordinarily have contact with the operation under review.
9. Cost Benefit Analysis: Investments in more costly systems must be judged in the light of expected benefits. Unfortunately, such benefits are difficult to measure.
Monitoring of Internal Controls
The monitoring of internal controls for effectiveness and necessity is the feedback element of the process. Without adequate monitoring of implemented procedures, how does a business determine the systems effectiveness? They can’t.
No framework for internal control is perfect in the sense that it can prevent some shrewd individuals from "beating the system" either by outright embezzlement or by producing inaccurate records. The task is not totally prevention of fraud, nor is it implementation of operating perfection, rather the task is the designing of a cost-effective tool that will help achieve efficient operations and reduce temptation.