PRINCIPLES OF CONTROL OF A COMPANY: PRINCIPLES AND EXAMPLES - DUDAS - 2025

The control principles of a company are the regulations that require the existence of procedures and processes established in accounting systems to help managers to supervise and regulate business activities, thus ensuring that the company's assets are protected.

The objective of the control principles is to ensure that the accounting system works properly and that business events are accurately recorded. Obviously, managers cannot supervise all employees, so there is a possibility of some mistakes or some fraud happening.

To identify and establish effective controls, management must continually assess risk, monitor implementation of the control, and modify controls as necessary.

Having such an essential business function provides reasonable security by reducing the likelihood of errors and safeguarding the organization's assets. Due to its importance, companies must consider the fundamental principles of control.

Main control principles

Control environment

The managerial style and expectations of senior managers, particularly their control policies, determine the control environment.

In a control environment there is additional supervision carried out by a management committee, which ensures that there is administrative integrity, ethical values, a well-defined organizational structure and competent and reliable employees, assigning authority and responsibilities.

Control activities

They are specific policies and procedures that management uses to achieve its objectives. These include the following:

Task separation

It requires different people to be assigned responsibility for performing different tasks in related activities, particularly those involving authorization, custody, or record keeping.

By requiring different people to perform these functions, a balanced system of control is created.

Approval of transactions and activities

It helps ensure that all company activities comply with established policies and guidelines.

Requiring certain managers to approve certain types of transactions adds an additional commitment to the accounting records, by showing that the transactions have been analyzed and approved by the appropriate authority.

Document standardization

It includes the creation of easy-to-use and sufficiently informative invoices and other documents, the use of pre-numbered and consecutive documents, and the timely preparation of documents.

Standardization makes it easy to review old records by looking for the source of any discrepancies in the system. Lack of standardization can cause some items to be overlooked or misinterpreted in such a review.

Physical and access controls over assets and records

They are electronic or mechanical controls (safes, identification cards, fences, cash registers, video cameras, locks) or computer controls, related to access privileges or established backup and recovery procedures.

Technology can generally go where people can't, and you can be on the job 24 hours a day without the need for additional pay.

Controlling access to an accounting system through passwords, locks, and electronic access records keeps unauthorized users out of the system, as well as provides a way to audit system use to identify sources of errors.

Independent reviews

Companies should periodically review their control systems. This should be done by someone who has not done any of the work to be verified.

These reviews help to ensure the reliability of accounting information and the efficiency of operations.

Assignment of responsibilities

The company must clearly establish responsibilities. Assigning specific responsibilities to people ensures that they understand their role in maintaining control.

If any responsibility is overlooked, an effective monitoring system will make it clear who is not performing an assigned task.

Examples

All these controls meet the objectives of the control principle. After the controls are in place, managers do not have to monitor the activity of each employee. They can periodically review controls to ensure they are working properly and focus on running the business.

Task separation

It is a good control to ensure that record keeping functions are separate from actual cash handling.

For this reason, the cashier is in charge of collecting cash from customers, with the possibility of depositing it in the bank, and the accounting department is in charge of registering these cash receipts and making bank reconciliations.

In this way, a single person cannot take the customer's money and misappropriate it, later covering up with fraudulent accounting.

If two people do these jobs, the only way fraud can work is if each person is in complicity with the other. Obviously, two complicit employees are much less likely than a single employee to steal.

Approvals

Requiring approval in order to make large expense payments can prevent unscrupulous employees from making large fraudulent transactions with company funds.

An official price list serves as an approval for sales personnel to sell at these prices. In addition, there may be a control that allows the sales manager to authorize reasonable changes to the price list.

Staff turnover and vacations

Mandatory employee turnover or vacation period is implemented to detect fraudulent schemes where it is required to have a regular system to maintain it.

If the accountant changes responsibilities every two months, a person will not be able to run a rogue system consistently.

Physical audits

Physical audits include the manual counting of cash and any other physical assets recorded in the accounting system, such as inventories.

Physical counting can reveal hidden discrepancies in account balances by completely bypassing electronic records. Counting the cash at the points of sale can be done daily or even several times a day.

Larger projects, like physical inventory, need to be done less frequently, perhaps annually or quarterly.

Periodic accounting reconciliations

They guarantee that the balances of the accounting system coincide with the balances of the accounts of other entities, such as banks, suppliers and customers.

The differences found between these types of complementary accounts may reveal discrepancies in the own accounts, or that the errors originate in the other entities.

Automated controls

They are probably the most common internal controls because they not only protect the company, but increase its efficiency.

Automated time clocks are a good example. Employees are checked by these clocks when they arrive and then checked at the end of their shift.

The automated time clock eliminates the possibility of employees cheating with their working hours.

References

1. MyAccountingCourse (2018). What are Principles of Internal Control? Taken from: myaccountingcourse.com.
2. MyAccountingCourse (2018). What is the Control Principle? Taken from: myaccountingcourse.com.
3. Michelle Miley (2017). What Are the Seven Principles of Internal Control? Bizfluent. Taken from: bizfluent.com.
4. TTUHSC (2017). Basic Principles of Internal Control. Taken from: elpaso.ttuhsc.edu.
5. CliffsNotes (2016). Internal Control. Taken from: cliffsnotes.com.
6. Administrator (2015). 17 Principles of Internal Control. Ethical Advocate. Taken from: ethicaladvocate.com.
7. David Ingram (2018). What Are the Seven Internal Control Procedures in Accounting? Small Business-Chron. Taken from: smallbusiness.chron.com.