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Internal Controls

Essay by   •  February 7, 2011  •  Essay  •  782 Words (4 Pages)  •  1,356 Views

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Introduction

In recent years, many organizations have published guidelines and standards on internal control and defined it in various ways. All of the definitions captured the basic concept of internal control using different words. The definitions are very similar in that they recognize internal control's extensive scope, responsibility, relationship to achieving the organization's mission, and its dependence on people in the organization. Internal Controls are an important part of each system used to regulate and guide operations. Internal controls are designed to promote performance, which leads to the effective accomplishment of an organization's goals and objectives. The internal control systems are the laws, policies and procedures that affect the daily operations and management of any organization. Individuals practice good internal control in their daily life when they balance their checkbook, save for retirement, and match credit card receipts with the monthly credit card statement.

Importance of the Internal Control Program

Internal control systems are essential to every entity regardless of size, type or whether it is held public or private. All managers and accountants should heed the principles of accounting systems and controls. Record keeping is absolutely vital for any business to function effectively and efficiently. Even the smallest of businesses must have some records to link transactions with customers and creditors. Disbursements and receipts must be linked to individual accounts. The cost of such a control system far outweighs the confusion that would result without it. An accounting system is a prudent business investment. All systems of internal control have items in common. These items should be viewed as a checklist that is then used to evaluate all business transactions i.e. purchases, sales, and payroll.

This system of control should always be monitored to confirm that it is working, as it should, and if changes are needed. The key to any successful control system is that its prescribed procedures are being implemented and conscientiously followed. No system or its framework is perfect. Preventing every inaccuracy, whether intentional or not, is impossible. The job is not to have total prevention of mistakes or fraud, nor is it to have the perfect implementation of the system. The goal is to have a cost-effective implement that will help achieve efficient operations and minimize temptation.

Internal Control Techniques

All good systems of internal control utilize techniques and have particular features. These are components that must be followed in order for the control system to work. These features/techniques include:

- Clear responsibilities for reliable employees; Personnel can make or break a system.

- Separation of duties; This helps to ensure that information has been collected and compiled accurately and also helps to prohibit two or more employees from collaborating to commit fraud.

- Proper authorization; this would include general and specific authorization. General authorization would be found in writing and it would define limits on prices, expenditures and perhaps customer credit limits. Specific authorization involves a superior manager or board of directors. These entities would grant authorization for things such as approval of overtime, raising set limits for expenditures of capital assets.

- Proper documentation; Immediate recording is

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