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
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