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Internal Accounting Control: Elements, Objectives and Example

 The internal accounting control  covers the methods implemented by a company to ensure the integrity of financial and accounting information, meet objectives and operational profitability, and transmit management policies throughout the organization. These overlap with the normal operating procedures of a company.

This overlap is intended to protect assets, minimize errors, and ensure that operations are performed in an approved manner. There are no identical internal control systems, but many control philosophies regarding financial integrity and accounting practices have become standard management practices.

Internal control comes at a price, which is that control activities often slow down the natural flow of a company's processes, which can reduce its overall efficiency. A key concept is that even the most comprehensive system of internal control will not completely eliminate the risk of fraud or error.

There will always be some incidents, usually due to unforeseen circumstances or overly determined effort by someone who wants to commit fraud.

Elements of internal accounting control

Task separation

Separation of duties involves dividing responsibility for accounting, deposits, reporting, and auditing. The additional duties are separate, there is less chance of a single employee committing fraudulent acts.

For small businesses with only a few accounting employees, sharing responsibilities between two or more people, or requiring critical tasks to be reviewed by coworkers can serve the same purpose.

Access controls

Controlling access to different parts of an accounting system through passwords, locks, and electronic access logs can keep unauthorized users out of the system, while also providing a way to audit system usage to identify the source. of errors or discrepancies.

Physical audits

Physical audits include manual counting of cash and any physical assets recorded in the accounting system; for example, inventories, materials and tools.

Physical counting can reveal well-hidden discrepancies in account balances, which are overlooked in electronic records.

The cash counting at the points of sale can be done daily or even several times a day. Larger projects, like manual inventory counting, need to be done less frequently, perhaps quarterly.

Standardized documentation

Standardizing the documents used for financial transactions — such as invoices, internal material requisitions, inventory receipts, and travel expense reports — can help maintain consistency in record keeping over time.

The use of standard document formats can make it easier to review records from the past when looking for the source of any discrepancies in the system. Lack of standardization can cause items to be overlooked or misinterpreted in such a review.

Trial balances

Using a double-entry bookkeeping system adds reliability by ensuring that the books are always balanced. Even so, it is possible for errors to throw the system out of balance at any given time.

Calculating daily or weekly trial balances can provide periodic information on the health of the system. This enables discrepancies to be discovered and investigated as soon as possible.

Periodic reconciliations

Accounting reconciliations can ensure that the balances of the accounting system match the balances of the accounts of other entities, such as banks, suppliers and credit customers.

For example, a bank reconciliation involves comparing cash balances and deposit and receipt records between the accounting system and bank statements.

Differences between these types of supplemental accounts can reveal errors or discrepancies in the accounts themselves. They can also show that the errors may originate with the other entities.

Authority for approval

Requiring specific managers to authorize certain types of transactions can add a layer of accountability to accounting records. This shows that the transactions have been viewed, analyzed and approved by the corresponding authorities.

Requiring approval in order to make large expenses and payments prevents unscrupulous employees from executing large fraudulent transactions with company funds.


Safeguard company assets

Well-designed internal controls protect assets from loss. The loss could be an accidental loss, which occurs from honest mistakes made by people. It could also be an intentional loss, resulting from intentional fraudulent activities.

Guarantee the reliability and integrity of financial information

Internal controls ensure that management has accurate, timely, and complete information — including accounting records — to plan, control, and report business operations.

Ensure compliance with the laws

Internal controls help ensure that the company complies with the many national, state, and local laws and regulations that affect business operations.

Promote efficient and effective operations

Internal controls provide an environment in which managers and staff can maximize the efficiency and effectiveness of operations.

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