In accounting and auditing, internal control entails procedures, mechanisms, and rules designed by an organization to enhance the integrity of financial information by preventing fraud and promoting accountability. Internal control is a fundamental process step that enables an individual to determine if particular requirements are done regarding policy and law (Kumar & Sharma, 2015). There are various internal control categories, including corrective, preventative, and detective, that work collaboratively to enhance efficiency in the accounting system.
The Sarbanes-Oxley act plays a fundamental role in an organization's internal control in various ways. The Act is a federal law that created sweeping financial regulations and auditing for public organizations. It has distinct rules such as implementing new auditor standards that help in minimizing conflict of interest. It also enables the organizations to deter from misappropriation and fraud of company assets because the Act imposes harsh penalties to people caught violating the rules (Patterson & Smith 2007). The Act also increases transparency because it encourages disclosure in the internal control systems.
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Various principles assist in assessing internal control. First, a separation of duties principle entails dividing responsibilities for deposits, auditing, bookkeeping, and reporting. Physical audit of assets is another principle that involves hand-counting physical assets and cash tracked within the accounting system. The principle helps in revealing hidden discrepancies in the system. Another principle is the standardized financial documentation used in transactions like inventory receipts and invoices (Kumar & Sharma, 2015). Assessing the standardized audits eases reviewing records when determining the origin of discrepancies in the system. The principle of approved authority is another principle that requires certain executives to authorize particular types of transactions. The principle enables the organization to inhibit unscrupulous workers from gaining large fraudulent transactions within the corporate funds. Another principle is the use of double-entry accounting methods to promotes reliability.
References
Kumar, R., & Sharma, V. (2015). Auditing: Principles and Practice . PHI Learning Pvt. Ltd
Patterson, E. R. & Smith, J. R. (2015). The effects of Sarbanes-Oxley on auditing and internal control strength. The Accounting Review, pp.427-455. https://doi.org/10.2308/accr.2007.82.2.427
