Internal Controls and Their Relevance/importance to Organizations

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Internal Controls and Their Relevance/Importance to Organizations

Corozal Junior College

January 19th, 2018

An internal control is a practice, policy or procedure a business follows/establishes within an organization to create value or minimize risk. The businesses do certain practices so that they can be certain their employee’s aren’t stealing from the company, most businesses do audits, take monthly stock and even install security cameras. These controls help to protect and organization against things such as fraud and theft by ensuring integrity in both financial and accounting information. This allows a business to achieve company goals and targets thus raising the productivity of the business. Success is almost impossible to achieve without standard internal controls in place because it would allow discrepancies to take place without anyone even knowing.

Internal controls have principles which are fundamental to their nature. One principle of internal control is Responsibilities, which means Assigning specific responsibilities to each employee to, ensures they have full understanding what their part is in maintaining internal control. Secondly, Record Keeping which is having accurate record-keeping procedures which will enable companies to have a valid history of transactions on hand. Saved data allows for the company to refer to it later, if a problem is discovered. Thirdly, Asset Records and Custody, the people who have physical access to cash and other assets are not the same people who keep the records relating to that asset record should not be able to physically access the assets one is tracking.

One way of separating these controls are by identifying them as either accounting or administrative controls. Accounting controls are methods and procedures that a business implements in order to protect assets, authorize transactions, monitor disbursements and legitimacy and ensure accuracy of financial statements. These controls are like rules in accounting that help with the effective and easy flow of a business. On the other hand, administrative controls are changes to the work place of a business in order to improve the safety of workers. These practices reduce the chances of employees having hazardous impacts due to unsafely practices being carried out, and with the reduction leads to an improvement in the performance of the workers and the success of the business.

As we already know internal controls are necessary for any organization to be successful, many of these control are physical such as physical audits. Physical audits is the hand counting of any physical asset such as cash, inventory and/or tools. This can reveal discrepancies which would have otherwise flown under the electronic radar, such as an employee stealing cash from the register, this is why items like cash are counted up to several times in a day for some cases while other items such as inventory may be counted monthly or quarterly. Another example of physical internal control is documentation, standardized documents such as invoices, inventory receipts, internal material reports, etc. are kept in order for it to be easy for the organization to view past records when looking for a discrepancy. If these items are not kept important information can be overlooked when searching for discrepancies. Since these documents are so important they need to be kept in a safe place such as vaults, which are usually guarded and only accessible to certain employees such as managers in order to avoid the tampering of such documents. Lastly, another physical internal control which is used by organization is security systems which include fire alarms, security cameras, burglar alarms, etc. These are mainly used in order to protect against theft whether at the hands of employees or someone outside of the organization.