INTERNAL CONTROLS

By: Renae Newby

LESSON OBJECTIVES

Define the term internal control

Identify two types of internal controls in a business

Outline the characteristics of good internal

controls

Explain the internal control for various aspects of a

business

Differentiate between an internal and an external

auditor.

DEFINITION OF INTERNAL CONTROL

These are the procedures, policies, guidelines and

regulations that are put in place to protect the assets

of an organization from theft, robbery,

unauthorization and misuse

They are used to improve or maintain the

operating efficiency and smooth running of the

organization.

TYPES OF INTERNAL CONTROLS

Accounting Controls

Administrative Controls

ACCOUNTING CONTROLS

Focuses on the protection of the assets of a

business from being manipulated by way of theft and

misuse.

It includes proper recording of transactions and

the presentation of reliable accounting data that

reflects the true value of assets.

EXAMPLE

Recording all cash received immediately is an

accounting control to keep track of the cash in the

business.

ADMINISTRATIVE CONTROLS

Focuses on making sure that the business is

operating as efficient as possible to achieve the

overall objectives.

C H A R A C T E R I S T I C S O F G O O D I N T E R N A L C O N T R O L S

Segregation of record keeping and custodianship

The person recording for the assets should not be the

person who has ultimate responsibility or custody of the

asset.

Rotation of duties

When employees are rotated it allows for individuals to

learn of any illegal or erroneous acts.

CHARACTERISTICS OF GOOD INTERNAL

CONTROLS

Documentation procedures

Allows for the recording of all transactions and the

use of source documents to support or justify

historical economics events. It includes the use of

receipts, invoices, debit and credit notes, goods

received note, etc.

CHARACTERISTICS OF GOOD INTERNAL

CONTROLS

Reconciliation/ check/ balancing

These are necessary for the continuous checking and

verification of amounts received or paid as well as

balances of assets. It is usually performed by senior

employees such as supervisors, junior managers and

any other senior personnel in an organization.

CHARACTERISTICS OF GOOD INTERNAL

CONTROLS

Competent and trustworthy personnel

Ensures that employees entrusted with the

responsibility or function of the organization are as

effective as possible (competent) in achieving the

objectives of the organization

CHARACTERISTICS OF GOOD INTERNAL

CONTROLS

Establishing responsibility

This identifies particular individuals as having

responsibilities for different aspects of the business,

so as to ensure that there are persons liable for

errors or other unwanted acts that are inconsistent

with the company’s objectives.

CHARACTERISTICS OF GOOD INTERNAL

CONTROLS

Physical, Mechanical and Electrical Controls

Physical : includes the use of supervisors to make sure that

people work or keep order within a company.

Mechanical: includes camera or gas pump that enables

additional protection or effectiveness of the functions to be

done

Electronical: includes alarms or beeping devices to alert

members of a company that something is wrong.

APPROPRIATE INTERNAL CONTROLS

For cash and bank balances

All cash and cheques received should be

accounted for and accurately recorded in the

books.

At least 2 persons must be present at the opening

of amounts received through the post.

Regular bank reconciliation should be done.

APPROPRIATE INTERNAL CONTROLS

For stock

Ensure that stock is adequately protected against

loss or misuse

Stock should be stored under conditions that will

prevent deterioration due to heat, cold, damp.

Recording of all receipts and issues should be

done at all times

APPROPRIATE INTERNAL CONTROLS

For Accounts Receivable

Ensure that all credit sales are made to loyal

customers

Ensure that all customer claims are fully

investigated before offering credit notes.

Every effort should be made to collect all debts

and the claims of bad debts should be proven

APPROPRIATE INTERNAL CONTROLS

For Accounts Payable

Ensure that goods and services are ordered in the

quantity, of the quality and at the best terms

available after appropriate requisition and

approval.

Only specified personnel should request goods and

services on specified forms with space for

acknowledgement.

INTERNAL AUDITOR VS. EXTERNAL AUDITOR

Internal auditor

A regular member of staff with the responsibility for the

implementation, reviewing and withdrawal of internal

controls

Reports to management up on reviewing internal

controls and make suggestions for improvement

Usually seen as part of management even though their

roles are prescribed by management

INTERNAL AUDITOR VS. EXTERNAL AUDITOR

External auditor

Not a member of the company but represents the

firm, contracted to perform auditing services.

Their work is prescribed by law

He/she needs to be qualified and licensed to

perform his/her roles.

External auditor

Examines the internal control system

Examine records and supporting documents

Verify values of assets and liabilities

INTERNAL AUDITOR VS. EXTERNAL AUDITOR

THE END