Introduction
Internal controls refer to the administrative mechanisms that are tailored to the business culture in order to ensure compliance with professional standards, ethics, and market policies. This safeguards the assets of the business, assures professionalism, and ensures that records are accurate. Internal controls are a worthwhile investment within big organizations because they obligate employees to work, even in the absence of supervision (Gray, 2007). There are various forms of internal controls, which this paper discusses:
Segregation of Duties
It is imperative that various transactional elements such as recording, authorization, and the custody of assets, should be conducted by different people to ensure that effective and efficient transaction takes place (Gray, 2007).
Delegate your assignment to our experts and they will do the rest.
Authorization of Controls
Authorization of controls is definitive of the situation in which a financial officer approves the purchase of goods on credit terms by any new clients to a business, in order to safeguard the concerned firm’s financial interests. The financial officer does not sanction the purchase of goods on credit terms unless a control check of credit is successfully accomplished (Gray, 2007).
Adequate records and documentation
Adequate recording and documentation such as the bank reconciliation which is usually done on a monthly basis are carried out within a business to ensure that the records in the cash book are accurate and complete (Gray, 2007). The bank statement and the cash book are reconciled every month for accuracy purposes.
Security of Assets
It is the responsibility of the management to ensure that the assets of the firm are always safe and that their records are accurate (Gray, 2007). It is significant to ensure that the assets are also well maintained. Machines should be serviced on a regular basis while buildings should be renovated. A tin for the storage of petty cash should be available for storing office cash.
Independent Checks and Reconciliation for each Business Area
Management should ensure that that an internal audit is carried out by an independent body that is free from internal manipulation. Businesses ought to audit their accounts every after the close of a definite trading period.
A System of Internal Controls for the Purchases, Payroll, and Fixed Assets Business Areas
Purchases
An effective internal control system for purchases should have a purchasing manager. Also important, is the development of standards for various types of purchases before the implementation of processes for the approval and submission of purchase requests (Ashe-Edmunds, n.d). It is also essential to have a list of vendors for recording vendors, better prices, credit terms, and customers care services. Finally, there is the need to develop an approval and submission process that workers use when submitting requests for purchases. This process should outline the available forms of approval in a manner that’s simple and clear.
Payroll System
A company can come up with a system that records the number of hours that every employee takes while working. Such a system will involve the use of a card machine that clocks in and out (Hall, 2011). A supervisor will be in charge of overseeing such like a process. He ought to also ensure that the time card’s hardcopy is sent to the department in charge of payroll at the end of every week. A clerk at the payroll department can then enter the data records into the time card in his computer and prepare paychecks. Such a process will automatically update the digital payroll records of employees. The clerk will then compile the time cards and present them to the supervisor who gives them to the employees for verification. The clerk also prepares payroll register copies that should be sent to the general ledger and the accounts payable departments. The accounts clerk will prepare a manual check for the whole payroll upon the receipt of the payroll register, which he deposits in the bank's imprest account for payroll. The check’s copy and that of the payroll register must be filed in the records at the department. The clerk must prepare a general ledger control account with the use of the department’s computer and the payroll register.
Fixed Asset System
Acquisition of assets starts in the user department when the responsible manager realizes the need to replace or buy a new asset. The user of the machine manually makes two purchase requisition copies (Hall, 2001). One copy will be kept in the user department while the second one will be taken to the purchasing department which will then use the copy to prepare three purchase order copies. A copy of the purchase order will be sent to the supplier, another one to the department of the accounts payable, and the third one will be with the purchasing requisition. The clerk of the accounts payable will get the purchase order from purchasing, the invoice of the asset from the vendor, as well as a packing slip from the dock who receives the asset when it arrives. The clerk will reconcile the invoice, the packing slip, and the purchase order and use the computer to post the liability to the subsidiary ledger of the accounts payable. He will also record the asset in the subsidiary ledger accounts for the fixed asset. The packing slip and the purchase order are filed in the departments of the accounts payable. A voucher for disbursing cash will be prepared by the clerk which he sends to the office of the clerk who is responsible for disbursing cash. The clerk will then prepare a summary of the hard copies of the ledger accounts of the fixed assets and the accounts payable which will be taken to the department of the general ledger. The clerk will prepare a check using a computer after the receipt of the invoice and the voucher for disbursing cash and post the data to the check register. A copy of the check will be sent to the vendor while the invoice and the cash disbursement voucher will be sent to the department of the general ledger.
Associated Risks in the Areas Discussed
Firstly, the assets can get lost, be damaged, or get stolen thereby interfering with the accuracy of the values as indicated in the financial statements. Secondly, errors during the determination of the useful life of an asset, its cost basis, and the assigned depreciation can affect the assets’ value.
Conclusion
Internal controls are a necessary component of business success. They ensure business self-regulation, by so doing promote professional accountability. This leads to business success.
References
Ashe-Edmunds, S. (n.d). Steps for Internal Control on Purchases. Retrieved from http://smallbusiness.chron.com/steps-internal-control-purchases-69919.html
Gray, I. (2007). The audit process: Principles, practice, and cases . London: Thomson Learning.
Hall, J., A. (2001). Accounting Information Systems. Retrieved from https://books.google.co.ke/books?id=iTsKAAAAQBAJ&pg=PA294&lpg=PA294&dq=Internal+Controls+for+Purchases,+Payroll,+and+Fixed+Assets&source=bl&ots=SVzNbU5Z1s&sig=3yiTU3QRhe-K5SPE_X21r2oo8hw&hl=en&sa=X&redir_esc=y#v=onepage&q=Internal%20Controls%20for%20Purchases%2C%20Payroll%2C%20and%20Fixed%20Assets&f=false
