The control environment is the basis for all other elements of the internal control structure. The control environment includes many factors such as ethical values, management’s philosophy, the integrity of the employees of the corporation, and the guidance provided by management or the board of directors. The second step in implementing internal controls of accounting is to review your current processes. The goal is to identify who does what and who, if anyone is a check or balance on that process.
What are the 7 internal controls in accounting?
The seven internal control procedures are separation of duties, access controls, physical audits, standardized documentation, trial balances, periodic reconciliations, and approval authority.
Many large companies have nonformalized processes, which can lead to systems that are not as efficient as they could be. The failure of the SCICAP Credit Union discussed earlier is a direct result of a small financial institution having a substandard internal control system leading to employee theft. One of the largest corporate failures of all time was Enron, and the failure can be directly attributed to poor internal controls.
The Three Main Internal Controls for Accounting and How They Protect Your Assets
Arthur Andersen provided a significant amount of services in both auditing and consulting, which prevented them from approaching the audit of Enron with a proper degree of independence. Also, among many other violations, Enron avoided the proper use of several acceptable reporting requirements. Recently, a strong impetus for internal controls resulted from payments that U.S. corporations made to foreign officials to obtain business. Internal controls are necessary because accounting systems are designed and run by people and people make errors.
With multiple copies of a server at multiple locations across the country, or even the world, in the event of disaster to one server, a backup server can take control of operations, protecting customer data and avoiding any service interruptions. A properly designed and functioning internal control system will not eliminate the risk of loss, but it will reduce the risk. Accounting controls are the plan of the organization and the procedures and records that are concerned with safeguarding the assets and the reliability of the financial records. Preventive controls are intended to keep a loss from occurring in the first place. For example, a business could segregate certain duties and install physical protections for assets.
How to Use Internal Controls?
An unscrupulous employee could steal cash, creating a false sale to cover it, or pocketing a payment on a vendor account. Communication with the customers and vendors, along with other internal controls, could uncover those defalcations. For instance, communication with an accountant could have saved the coffee shop tens of thousands bookkeeping for startups of dollars. Advances in technology and data analysis have led to the development of numerous tools which can automatically evaluate the effectiveness of internal controls. Used in conjunction with continuous auditing, continuous controls monitoring provides assurance on financial information flowing through the business processes.
Internal controls are vital to ensuring the integrity of companies’ operations and the trustworthiness of the financial information they report. The Sarbanes-Oxley Act of 2002 spurred internal controls in the aftermath of such scandals as those involving Enron and WorldCom to protect investors from corporate accounting fraud. In addition, preventative internal controls include limiting physical access to equipment, inventory, cash, and other assets. In this article, we will discuss the importance of internal controls in accounting to help you to establish an effective internal control system in an organization.