Introduction to Accounting Internal Controls Sample Paper
When looking at internal control there are two primary goals for internal control. The first goal is to make sure the companies assets are kept safe. This would include but not exclude theft, robbery, fraud and other unauthorized personal walking out the door with the company’s assets. The second primary goal of internal control is to make sure the accounting records are being properly kept whether it is because of intentional or unintentional errors.
Sarbanes-Oxley Act better known as SOX was implemented by the government making the board of directors and the corporate executives more responsible for their company’s internal control. SOX not only require that a company have dependable and working internal control at the start they must also show how the internal controls continually work. SOX also requires that that an auditor that is not with the company come in and verify that these internal controls will and do work. SOX also made the Public Company Accounting Oversight Board or better known as PCAOB and their purpose is to make the auditing standard and regulates auditor’s activities.
A company who announces deficiencies in its internal control would probably experience a fall in the price of its stock for a few reasons. The first reason would be that some investors may pull their funding if they do not believe that it is being properly protected. Another reason that there may be a fall in stock is that people may not buy the stock if they feel the company is at risk of losing money.
When looking at internal control there are certain limitations that go along with it. One example of a limitation of internal control would be management override. In most companies a high level manager can override the internal control procedure and would allow them to receive personal gain. Another limitation to internal control would be collusion. There can be a number of employees that are working together to change the financial information in manner that would not be caught by the internal control system. Human error is another limitation that internal control has. The information could be entered wrong or the person could just not do it properly.
Internal control is set into place so that the company is protected from theft and fraud. Internal control is also in place to make sure that the accounting records are being properly kept. SOX is one way to insure that the company and its records are protected. Those that are unable to follow internal control procedures may lose money in the long run. The company still needs to keep in mind there are certain limitations to internal control but for the most part it is beneficial to them to keep internal control procedures in place.
There are a number of internal control procedures that a company can take to protect itself four of these would be establishment of responsibility, using physical, mechanical, and electronic controls, segregation of duties and independent internal verification. Each of these procedures has a important purpose behind them and that is making sure that missing assets and errors are caught as soon as possible.
When looking at internal control establishment of responsibility is one of the major ones. What establishment of responsibility covers is making sure that there is one person that is responsible if money were to come up missing during a certain time. An example would be if a company did not have this internal control in place there can be three different people saying it was the other persons fault when money came up missing. Here is where internal control procedure establishment of responsibility comes into play.
If there are two people with access to the funds one is in charge during certain times so if person A takes a lunch they are to count the money and have person B count the money to insure they come up with the proper amount. When person A comes back from lunch the money will be counted again to make sure there is a proper amount. In this scenario if person A came back from lunch and the money was not all there it would be person B’s fault and vice versa.
The next internal control that is useful in almost any business would be using physical, mechanical, and electronic controls. Physical control would be having a lock on the file cabinets, having a hand scan, safe, verbal passwords, or a guard. Mechanical and electronic controls would include an alarm system, time punch for employees, or password generator. These work well together because there will be those out there that might be able to get past one or two much it will more than likely not be worth the effort to get around all three of them.
Independent internal verification is a good internal control because it will allow someone other than the person in charge of your books be able to catch any unusual activities or errors. Having a fresh pair of eyes on your books will catch a lot of mistakes that your regular accountant may have over looked. Having an independent internal verification will also help in finding out if the person in charge or your books is falsifying records for personal gain.
Having just these four internal controls in place will help find anyone that may be taking assets for personal gain, deter potential robbers, and will help find mistakes that may arise. There are a number of other internal controls that a company can put in place to protect itself if they just take a little time and money.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley.