Question

Internal controls are a set of policies and procedures, which are created to ensure consistent reliability of accounting systems. Internal control procedures in accounting are typically divided into seven categories, for the purpose of fraud prevention and recognition of errors before they emerge as problems.

Briefly discuss each of the seven internal controls.

Answer 1

Internal Control policies and procedures are implemented in the companies / firm to make sure that the authenticity / reliability / accuracy of accounting system is maintained. This also act as a mechanism for controlling the fraud / theft etc.

Seven Internal Control are as follows: -

1. Duty separation.

Responsibilities of work is divided among employees so that cross checking can be done by the employees. Also, with duty separation a maker or checker can also be infused in the system so that this can reduce the possibilities of frauds / theft.

2. Access Controls.

Access to the system / data / accounts etc should be restricted to the authorized persons. Authorized persons should be having valid user id / passwords so that nobody else access anyone else's data / system. A log of users and data access can be used to trace if there is any unauthorized access.

3. Physical Audits.

Periodical Physical audit is doing the physical checking of inventories, cash, fixed assets etc. to check if there is any discrepancy with the records. Also, it ensures periodical checking of the location of inventories, fixed assets etc.

Frequency can differ from company to company or nature of the audit being conducted for. Example - For cash sales same can be counted every day basis, inventory checking can be done daily / weekly / monthly depending upon the requirement and nature of business.

4. Documentation.

Documentations help in proper accounting and records of the transactions. Documentation process should be standardized so that past records can be retrieved for comparison or checking purpose in case of any discrepancy. Documents like Material receipts, cash receipts, purchase invoices, sales invoice etc can be used for documentation purpose.

5. Trial balance.

Double entry system ensures that Dr / Cr balances matches. Any, mismatch can lead to discrepancy and same can be checked daily, weekly as per the requirement.

6. Reconciliation.

Periodical Reconciliation with other entities can help figure out the discrepancy immediately. Other entities like Bank, vendors, customers etc. Reconciliation should be done as frequently as possible. This will help to stop any discrepancy and figure out the same in time with frequent checking. Example - Mismatch with vendors can help us to find out if any doubling of invoice recorded or wrong invoice has been recorded.

7. Approval Matrix.

Approval matrix is the hierarchy structure in which Boards / CFO / CEO / Managers etc are assigned approval authorities for different transactions. This approval matrix ensures proper control and decisions are taken towards the differing amount of transactions. Like large deals normally should be approved at CFO / CEO or the Boards level. Large deals definition / amount may vary from organisation to organisations.