Question

Why are internal controls important in an organization? Describe some internal controls that relate to cash receipts and cash disbursements. Please answer in your own words. Do not use outside resources.

Answer 1

The objectives of internal controls may include :

1. Preventing fraud - An objective of an internal control may be to prevent or minimize fraudulent activities within an organization. So an internal control like requiring authorization from a superior officer for certain transactions or having duties within the organization segregated may prevent fraud.
2. Increasing operational efficiency
3. Streamlining of operations.
4. Timely preparation of financial statements.
5. Safeguarding of assets.

1-Physical control / possession - ie who has the cash, were it is stored, and who has access to it.

2- Record keeping- who maintains the accounting records and who is authorized to adjust these records

3-Authorizing transactions- who has the authority to sign off over disbursements.

Ideally these three areas should be performed by separate individuals to ensure adequate segregation of duties. For example the person who physically has access to the money, should then not also have the ability to alter the accounting records. If they did they could cover up potential fraud