Features of effective Internal Control Mechanism
For any business to prosper, it should put in place procedures, policies, and plans to ensure that it operates effectively and efficiently. These measures are known as internal controls and are there to monitor the firm’s assets, minimize errors, prevent fraud and misappropriation of resources by managers or employees as well as ensure the accuracy of accounting data. At the same time, these controls help in ensuring that the laid down management practices are adhered to for efficient and effective operations. Businesses with weak internal controls are likely to face serious predicaments ranging from loss of market share, financial loss and loss of consumer confidence to generally weak managerial culture, and this usually adversely affects the operations of any organization. In this paper, I will look at internal controls specifically relating to sales and cash areas
In sales as an area, several activities can be undertaken to ensure achievement of the set objectives. It is imperative that an invoice is prepared to accompany any goods that are shipped. This will help keep a clear record of any transactions involving the movement of products. Also, their clear tracking of records may be ensured through the coding of different products and services. It is easy to access information pertaining to particular products when they are coded. Matching documents with details that are specific to them during entry is also equally important in this area. Effective control systems must have provisions for the evaluation of inserted codes so as to avoid confusion and omissions in transactions. Systems also have to be put into place for the purposes of comparing transaction documents (Hightower, 2013).
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Cash collection is an area of business in its own right and is one of the most sensitive areas of business for that matter. This is because managers and employees can easily interfere with the financial records with the aim of misappropriating funds. Therefore, it is an area that needs proper and constant monitoring. The activities here are to include coming up with charts of accounts, reviewing cash payments before managers release them and segregation of duties. Any systems that are geared towards the monitoring of cash flows must evaluate the segregation of duties to ensure that they are in line with the set objectives. It also must employ proper investigation of the financial statement of firms and observation of cash sales procedures (Leitch, 2008).
Sometimes goods are returned by buyers to the sellers in exchange for other goods or for monetary refunds. This is what is referred to as sales returns. Sales returns may happen for a number of reason, for example, goods may be defective, or an incorrect order may have been placed. In order to discourage this from happening, the release of goods for delivery should be preceded by stringent verification aimed at ensuring goods are shipped out in good time, and that there is proper record keeping for easy cross-checking of what is returned and of what quantity.
Associated Risks
Goods sold may be handled improperly such that they are not in order by the time they get back to the seller. This may lead to loss of huge amounts in a business set up. In the cash area, wrong amounts may be received. Sales figures may be recorded incorrectly.
Specific Controls
Transactions should be sanctioned and ascertained by different personnel to prevent embezzlement of funds in any business.The transactions should be independent of partisanship. The custody of assets and records should often be executed by different individuals for maximum efficiency. Segregated duties involve designing information that is user-friendly to ensure that transactions are all accounted for. Reconciliation statements are documented in bank and company records.These independent records are used in checking the time log and for a confirmation of any errors that may have arisen.The bank reconciles the balance reports as per the book and balance as per the bank so as to adjust any errors and maintain correct cash balances (Leitch, 2008).
References
Hightower, R. (2013). Internal controls policies and procedures. Hoboken, N.J: Wiley.
Leitch, M. (2008). Intelligent internal control and risk management: Designing high-performance risk control systems. Aldershot, England: Gower.
