In: Accounting
Internal controls are policies and procedures put in place to ensure the continued reliability of accounting systems. Accuracy and reliability are paramount in the accounting world. Without accurate accounting records, managers cannot make fully informed financial decisions, and financial reports can contain errors. Internal control procedures in accounting can be broken into seven categories, each designed to prevent fraud and identify errors before they become problems
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1.Separation 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.Trial Balances
Using a double-entry accounting system adds reliability by ensuring
that the books are always balanced. Even so, it is still possible
for errors to bring a double-entry system out of balance at any
given time. Calculating daily or weekly trial balances can provide
regular insight into the state of the system, allowing you to
discover and investigate discrepancies as early as possible.
6.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.
7.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