Identify an internal control structure and describe an effective internal control structure, relating to accounting and...

Identify an internal control structure and describe an effective internal control structure, relating to accounting and preparing accurate financial statements.

Expert Solution

In the current scenario of decentralized system where every employee could be given acess only to the files he would actually require, tracking of the work done on real time basis and the over dependence on the IT systems have lead ways to the new types of fraud and error cases. Financial Accounts have always been vulnerable to the errors and moulding of the financial statements to mis handle and represent information, introduction of current times ERP system have though eased the process but also have complicated the matter in terms of anonimity it can provide in absence of checks at the post.

It is imperative to have basic internal controls in a mid size company also. There have been number of time tested techniques which could be used as internal controls. A model internal control structure should incorporate the following in it:

Segregation of employee duties: For ex. We see that in Banks, there are two persons to carry out single transaciton. First employee initiate the transaction based upon the vouceher and the other person verify it. Only after the verification by the other person, the entry gets passed into the sysem. Segregation of duties puts the case where if any fraud is to be happened than it is required to have atleast 2 persons to complicate the act.

Assignment of specific duties to each employee: A person specialized in marekting should not be made to sit and do the accounting entries. For better productivity make sure that job is allocated to the right person in conses with his own preference.

Rotation of employee job assignments Some companies rotate job assignments to discourage employees from engaging in long-term schemes to steal from them. Employees realize that if they steal from the company, the next employees assigned to their positions may discover the theft.

Record Keeping. Companies should maintain complete and accurate accounting records. One or more business documents support most accounting transactions. These source documents are an integral part of the internal control structure. For optimal control, source documents should be serially numbered.

A table depeciting the various check and balances from the point of purchase to the sale and receipt of the amount below:

Transaction	Internal Control
Raw material purchase	Take quatation from 2-3 vendors and consider past performance, market repuration and quality of the product offered by vendor along with price
Raw material into warehouse	Have a quality check the post when raw material is coming, prepare a check list and have dedictate quality check manager to make sure that no defective units is passed.
Production	Production managers must have tools to make sure that any production faults is corrected timely
Sales	At the time of deleivey, make sure that if any credit terms are given to the buyer, the sane is authorized by the management. Also have documentation of the basis used by the management to allow the credit sales along with the terms of payment.
Accounts Receivable and Payable	Proper monitoring of the accounts to verify that no AR or AP is overdue
Posting the transaction	Make sure that errors like transposition, trancuation are avoided by implanting proper measures like two person authentication, periodic ledger scrutiny, reconciling bank statements and the accounts balances

ekkarill92 answered 2 years ago

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