Question

You have decided to open a sports store that sells sporting equipment and competes with the local sporting goods chain. List an internal control procedure that you would implement in the store. Describe the procedure and explain how it would safeguard the business and/or its assets. Explain why it would be important to implement this internal control and what potential loss you would be safeguarding against.  

Answer 1

MEANING OF INTERNAL CONTROL SYSTEM

Internal control is a process designed to facilitate and support the achievement of business objectives. Any system of internal control is based on a consideration of significant risks in operations, compliance and financial reporting

LIST OF INTERNAL CONTROL PROCEDURE THAT WOULD IMPLEMENT IN THE STORE, Describe the procedure and explain how it would safeguard the business and/or its assets

1. Segregation of Duties

Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting, and auditing. The further duties are separated, the less chance any single employee has of 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 co-workers can serve the same purpose.

2 .Access Controls

Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access in the first place.

3.Physical Audits

Physical audits include hand-counting cash and any physical assets tracked in the accounting system, such as inventory, materials, and tools. Physical counting can reveal well-hidden discrepancies in account balances by bypassing electronic records altogether. Counting cash in sales outlets can be done daily or even several times per day. Larger projects, such as hand counting inventory, should be performed less frequently, perhaps on an annual or quarterly basis.

4.Standardized Documentation

Standardizing documents used for financial transactions, such as invoices, internal materials requests, inventory receipts, and travel expense reports, can help to maintain consistency in record keeping over time. Using standard document formats can make it easier to review past records when searching for the source of a discrepancy in the system. A lack of standardization can cause items to be overlooked or misinterpreted in such a review

5.Periodic Reconciliations

Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances in accounts held by other entities, including banks, suppliers and credit customers. For example, a bank reconciliation involves comparing cash balances and records of deposits and receipts between your accounting system and bank statements. Differences between these types of complementary accounts can reveal errors or discrepancies in your own accounts, or the errors may originate with the other entities.

6.Approval Authority

Requiring specific managers to authorize certain types of transactions can add a layer of responsibility to accounting records by proving that transactions have been seen, analyzed and approved by appropriate authorities. Requiring approval for large payments and expenses can prevent unscrupulous employees from making large fraudulent transactions with company funds

IMPORTANCE OF INTERNAL CONTROL

- to detect error and fraud with ease

- to avoid and minimize the possibility of commission of errors and fraud by any staff

- to increase the efficiency of the staff working within the organization

- to locate the responsibility area or the stages where actual fraud and error occurs

- to prevent and avoid the misappropriation or embezzlement of cash and falsification of accounts

what potential loss you would be safeguarding against.  

1. Segregation of Duties

• Persons who can authorize purchase orders (Purchasing) should not be capable of processing payments (Accounts Payable).
• The person who prepares the deposit should not post the receipts to the customer accounts.
• The person who prepares the payroll voucher should not distribute or have custody of the payroll checks

2.Access to Assets

• An employee who only needs to view computer information should be restricted to Read and File Scan access and should not be granted Write and Create access.
• Only authorized individuals should be issued keys for restricted areas.

3 Form Over Substance

• The account manager's signature attests to the accuracy of the payroll voucher information, but if the account manager does not have the assurance that the supporting time records are accurate, the approval process lacks substance.