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Read the highlightsInternal controls are the processes, checks and balances that need to be put in place as a business grows. Internal controls can relate to any aspect of your business, from human resources to IT. Internal controls in accounting are critical and are used for safeguarding assets. Having a system of internal controls, including a segregation of duties, matters because as much as you trust your team, simply having a team means there is no longer one person with complete oversight and knowledge of the operations. When implementing an internal control procedure, ensure it includes a means to generate evidence that a process has been followed or completed. This may be as simple as requiring that a document be initialled—but if there is nothing to show that something happened, it didn’t! Benefits of internal controlsAs your business grows and becomes more complex, it is more likely that errors, duplication or omissions can occur. For example, without internal controls to dictate who is responsible for certain purchases, more than one person may make the same purchases, resulting in duplication and waste. Or products may be received by mistake from a supplier and, without internal controls, the fact that the items were not ordered may be missed. There are many other reasons to implement internal controls—and the longer you wait to introduce these procedures, the more difficult it will be to change your company’s processes and to get buy-in from your employees (see below). The importance of internal controls in accountingWhy establish internal controls in accounting? If you are required to have a review or an audit but do not have sufficient internal controls in place, an accountant will not be able to satisfactorily conduct their tests. And if you are claiming a tax credit such as through the SR&ED Program, you may not be able to support your claim if you do not have adequate timesheets and other records, and this could result in a significant loss of funding. Securing the buy-in from your employeesEmployees may have a negative reaction to the implementation of internal controls. They may feel that these are time consuming, labour intensive or show a lack of trust in them. It is important to communicate to your co-workers and colleagues that these processes are required as the business grows, not only for oversight purposes (although this is certainly part of it) but also for planning, tracking and review purposes. Types of internal controls: Preventative and detectiveInternal controls generally fall into one of two categories: preventative or detective. Preventative controls are those such as requiring dual signatures on cheques or having password-protected files. This type of control protects and limits access to business assets. Detective controls include reconciling the bank or inventory counts. Typically these internal controls are performed periodically to see if any need to be corrected. They will often turn up internal errors or problems, as well as any external errors (such as bank errors). Segregation of duties: Safeguarding assetsOne of the key concepts in placing internal controls over a company’s assets is segregation of duties. Segregation of duties serves two key purposes:
Segregation of duties involves separating three main functions and having them conducted by different employees:
This segregation of duties is often difficult to achieve in small businesses, but should be implemented as much as possible. In some cases, it may result in an employee from another department being responsible for one of the functions. When having adequate internal controls is not possibleWhere it is not possible to have adequate preventative internal controls including segregation of duties, it is important to implement a compensating control. An example of this could be increased periodic oversight by you or the board of directors. Summary: Internal accounting controls (e.g., processes, checks, balances, segregation of duties) safeguard assets and need to be implemented early on.Read next: Internal controls in accounting: Oversight of financial transactionsSafeguard Business Assets with (Better) Internal Controls Many business owners are discovering that their assets are not as well protected as they thought. Smaller businesses with one or two employees managing all of the finances are particularly susceptible to misappropriation of assets. Often there are no checks and balances to verify that transactions are accurate or appropriate. According to the Association of Certified Fraud Examiners’ 2016 Report to the Nations, the median loss for all the cases in their study was $150,000. When schemes lasted more than five years, the median loss rose to $850,000. Businesses with fraud hotlines were much more likely to detect fraud through tips than those without. When proper financial and operational controls are not in place, employees (and owners!) can learn to manipulate the accounting system to their benefit. Whether they take money from the company or their mistakes are undiscovered, the end result can greatly impact a company’s management decisions, financial reports, tax filings, and financial stability. Unfortunately, once your financial records have been altered, discovering problems is extremely difficult. Most standard accounting practices are not designed to uncover internal problems such as embezzlement. Therefore, the best way to safeguard your company’s assets is to recognize and improve weaknesses in your internal procedures. The following business practices and procedures can help you minimize potential internal control problems:
This limited list of internal controls can help reveal financial discrepancies and protect your company’s assets as well as recognize the excellent efforts of your staff. For more information on how Herbein + Company, Inc. can help you review your current internal controls or develop and implement the proper controls to protect your company, contact Steven M. Wolf at . What is an internal control procedure used to safeguard a company's assets?Detective Internal Controls
Examples of detective controls include an inventory count, internal audits, and surprise cash counts. Detective internal controls protect a company's assets by finding errors when they occur so that business owners can minimize their impact on the company.
Which of the following is an internal procedure that many businesses use to control cash?Explanation: A basic internal control procedure is to deposit all cash receipts in the bank shortly after the cash is received. It is common for company's to deposit cash receipts on a daily basis.
Which of the following is an internal control procedure designed to protect cash receipts?Which of the following is an internal control procedure designed to protect cash receipts? checks facilitate the separation of duties associated with cash payments.
What are the two internal control measures that a business can use to control cash?To control cash transactions, organizations should adopt some of the following practices: Require background checks for employees, establish segregation of duties, safeguard all cash and assets in secure locations, and use a lockbox to accept cash payments from customers.
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