Question

Which of the principle(s) of internal control apply to most businesses?

Answer 1

The fundamental principles of internal control apply to both large and small businesses.Every business requires some system of control measures as a means to protect assets and ensure that accounting records are reliable.Usually Internal controls are prevention or detection oriented.The principles of internal control that apply to most businesses are ;

Principle of Separation

access controls,

physical audits of assets,

standardized financial documentation,

periodic reconciliations,

and approval authority requirements.

1.Separation of duties involves splitting the responsibility for bookkeeping, deposits, reporting and auditing.If the duties are separated, the chances are less for any single employee for committing fraudulent acts.

2.Access Controls - Controlling access to different parts of an accounting system using passwords, electronic access logs etc 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.

3.Physical Audits of Assets - Physical audits include hand-counting cash and other physical assets such as inventory, materials and tools. Physical counting can reveal well-hidden discrepancies in account balances by bypassing electronic records altogether.

4.Standardized Financial Documentation- Standardizing financial documents such as invoices,inventory receipts,travel expense reports etc 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- Periodical accounting reconciliations can ensure that balances in your accounting system match up with the balances in accounts held by other entities like banks, suppliers and credit customers.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 Requirements- 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.For example,requiring approval for large payments and expenses can prevent unethical employees from making large fraudulent transactions with company funds.