INTERNAL ACCOUNTING CONTROL: ELEMENTS, OBJECTIVES AND EXAMPLE - DUDAS - 2025

The internal accounting control covers the methods implemented by a company to ensure the integrity of financial and accounting information, meet operational objectives and profitability, and transmit management policies throughout the organization. These overlap with the normal operating procedures of a company.

This overlap is intended to protect assets, minimize errors, and ensure that operations are performed in an approved manner. There are no identical internal control systems, but many control philosophies regarding financial integrity and accounting practices have become standard management practices.

Internal control comes at a price, which is that control activities often slow down the natural flow of a company's processes, which can reduce its overall efficiency. A key concept is that even the most comprehensive system of internal control will not completely eliminate the risk of fraud or error.

There will always be some incidents, usually due to unforeseen circumstances or overly determined effort by someone who wants to commit fraud.

Elements of internal accounting control

Task separation

Separation of duties involves dividing responsibility for accounting, deposits, reporting, and auditing. The additional duties are separate, there is less chance of a single employee committing fraudulent acts.

For small businesses with just a few accounting clerks, sharing responsibilities between two or more people, or requiring critical tasks to be reviewed by coworkers can serve the same purpose.

Access controls

Controlling access to different parts of an accounting system through passwords, locks, and electronic access logs can keep unauthorized users out of the system, while also providing a way to audit system usage to identify the source of errors or discrepancies.

Physical audits

Physical audits include manual counting of cash and any physical assets recorded in the accounting system; for example, inventories, materials and tools.

Physical counts can reveal well-hidden discrepancies in account balances, which are overlooked in electronic records.

The cash counting at the points of sale can be done daily or even several times a day. Larger projects, such as manual inventory counting, need to be done less frequently, perhaps quarterly.

Standardized documentation

Standardizing the documents used for financial transactions - such as invoices, internal material requisitions, inventory receipts, and travel expense reports - can help maintain consistency in record keeping over time.

The use of standard document formats can make it easier to review records from the past when looking for the source of any discrepancies in the system. Lack of standardization can cause items to be overlooked or misinterpreted in such a review.

Trial balances

Using a double entry bookkeeping system adds reliability by ensuring that the books are always balanced. Even so, it is possible for errors to throw the system out of balance at any given time.

Calculating daily or weekly trial balances can provide periodic information on the health of the system. This enables discrepancies to be discovered and investigated as soon as possible.

Periodic reconciliations

Accounting reconciliations can ensure that the balances of the accounting system match the balances of the accounts of other entities, such as banks, suppliers and credit customers.

For example, a bank reconciliation involves comparing cash balances and records of deposits and receipts between the accounting system and bank statements.

Differences between these types of supplemental accounts can reveal errors or discrepancies in the accounts themselves. They can also show that the errors may originate with the other entities.

Authority for approval

Requiring specific managers to authorize certain types of transactions can add a layer of accountability to the accounting records. This shows that the transactions have been viewed, analyzed and approved by the corresponding authorities.

Requiring approval in order to make large expenses and payments prevents unscrupulous employees from executing large fraudulent transactions with company funds.

goals

Safeguard company assets

Well-designed internal controls protect assets from loss. The loss could be an accidental loss, which comes from honest mistakes made by people. It could also be an intentional loss, resulting from intentional fraudulent activities.

Guarantee the reliability and integrity of financial information

Internal controls ensure that management has accurate, timely, and complete information - including accounting records - to plan, control, and report business operations.

Ensure compliance with the laws

Internal controls help ensure that the company complies with the many national, state and local laws and regulations that affect business operations.

Promote efficient and effective operations

Internal controls provide an environment in which managers and staff can maximize the efficiency and effectiveness of operations.

Compliance with goals and objectives

The system of internal controls provides a mechanism for management to monitor the achievement of operational goals and objectives.

Example

Liquid assets always need more protection than illiquid assets, because they are easier to steal; for example, taking cash.

Cash is the most liquid asset and can be easily stolen by any employee who handles it. To protect the cash of the company is that special internal controls are implemented.

Internal control of separation of duties is often used with cash. This control requires that the person who receives the cash from the customer and the person who records the cash receipt in the accounting system are never the same employee.

In fact, some internal control systems go one step further and require one employee to collect the cash, another to deposit it in the bank, and another to record it in the accounting system.

By segmenting the duties of each employee, no single person can collect the cash, deposit it, and record the sale in the accounting. This prevents fraud, because thus a person cannot pocket part of the cash collected and record a smaller amount of the cash receipt in the accounting system.

References

1. Steven Bragg (2018). Internal control. Accounting Tools. Taken from: accountingtools.com.
2. Investopedia (2018). Internal Controls. Taken from: investopedia.com.
3. Rebekiah Hill (2018). Internal Controls in Accounting: Definition, Types & Examples. Study. Taken from: study.com.
4. University of Washington (2018). Internal Controls. Taken from: finance.uw.edu.
5. David Ingram (2018). What Are the Seven Internal Control Procedures in Accounting? Smallbusiness - Chron. Taken from: smallbusiness.chron.com.
6. My Accounting Course (2018). What are Internal Controls? Taken from: myaccountingcourse.com.