Question

Briefly discuss the seven broad principles of internal control. At what stage in the development of a business do internal control procedures become especially critical?

Answer 1

Solution: Internal control procedures in accounting can be broken mainly into 7 types.

1) Separation of Duties

2) Access Controls

3) Physical Audits

4) Standardised Documentation

5) Trial Balances

6) Periodic Reconcilliations

7) Approval Authority

Internal controls are policies and procedures put in place to the ensure continued of accounting systems. In every accounting system depends on mainly Accuracy and reliability. In accounting system without accurate, records can contain errors.

1) Separation of Duties: In this, involves splitting of responsibility for bookkeeping, deposits, reporting and auditing. The duties are separated, the less chance any single employee has of committing fraudulent acts. For small businesses with only a some accounting employees it means two or more people. when the time of duties separation the accounts are accuracy and reliability.

2) Access Controls: Controlling access to different parts of an accounting system. It means passwords, lockouts and electronic access logs also. 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, Physical counting can reveal of discrepancies in account balances by electronic records altogether. In this physical audits mainly can uses daily or more times per day.

4) Standardised Documentation: Standardising documents used for financial transactions, such as invoices, internal materials requests, inventory receipts and travel expense reports, can help to maintain consistency always in book keeping over time. when we need to past records, standard documents very useful for information. A lack of standardisation can cause items to be overlooked or misinterpreted in such a history.

5) Trail Balances: In this accounting system, Trail balance is very important. It is using double entry accounting system adds accuracy and reliability by the books are always balanced. Even, it is still possible for errors to bring a accounting system out of balance at any given time. Calculating daily or weekly trial balances can provide regular the state of the system.

6) Periodic Reconciliations: Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances in accounts held by the other entities, including banks, suppliers, credit customers etc...

7) Approval Authority: Requiring specific managers to authorised certain types of transactions can add a layer of responsibility to accounting records by proving that transactions have been seen, analysed and approved by appropriate authorities. Requiring approval for large payments and expenses can prevent unscrupulous employees from making large fraudulent transactions with company funds. When implementing an internal control procedure, ensure it includes a means to generate evidence that a process has been followed or completed.

For example: Internal controls are the processes, checks and balances that need to be put in place as a business grows. Internal controls can relate to any aspect of your business, from human resources to IT. Internal controls in accounting are critical and are used for safeguarding assets. Having a system of internal controls, including a segregation of duties, matters because as much as you trust your team, simply having a team means there is no longer one person with complete oversight and knowledge of the operations.