Internal controls are an integral part of a business operation because of the extreme importance of assets. Assets are basically an economically valued item owned by an individual or corporation, which most often has a direct conversion rate to cash. Examples are cash, securities, accounts receivable, in-stock product, business equipment, real-estate, cars, and other valuable property. Assets are business resources which could lead to being able to generate future services and benefits. Operational goals of profitability are achieved through a company’s assets.
These are the resources and possessions which allow businesses and corporations to provide goods and services to generate profits. Assets can be current assets like cash, accounts receivable, inventory, and prepaid expenses that generate profits or gains within the current accounting period. They also can be long-term items such as property and business equipment. Since these assets are a businesses’ or corporations’ most valuable resources, they must be protected from theft and unauthorized use by creating, and implementing, a company “internal controls system.
Internal controls are procedures and protocols by which a company conducts internal monitoring. Through self-monitoring, a company increases the chance of success. Also, these controls systems ensure the liable parties invested in companies that their business are running efficient. Internal controls form an integral part of any business. In laymen’s terms, it is a system of internal controls which minimize errors in the accounting records, and deter fraud and embezzlement. Because these internal controls protect against many illegal happenings in businesses, they are rightfully required by law.
The Sarbanes-Oxley Act (SOX) of 2002 was passed after numerous corporate scandals. It required companies to be more much more thorough to implementing and checking their internal controls. According to Sarbanes-Oxley Act 2002 (2006): A Guide to the Sarbanes-Oxley Act: “The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations, large and small, MUST comply. ” Corporate presidents, CEOS and other top leaders are responsible for ensuring the accuracy and reliability of established internal controls over many facets of the business, the most important arguably being the financial reporting.
In addition to internal entities, external auditors are required to confirm that control levels are sufficient. This act, passed in 2002, helps protect companies and their stockholders from mistakes and illegal maneuvering inside the company or corporation. Although complying with SOX is can be draining on man-power, resources, and very costly, it was much needed. The principles of internal control are: establishment of responsibility; segregation of duties; documentation procedures; physical, mechanical, and electronic controls; independent internal verification; and other controls such as bonding and requiring employees to take vacations.
In comparing these principles of internal control, some pluses and minuses, or pros and cons of each aspect become clear. An essential rule of internal controls is that all businesses and corporations should have “established procedures” for documents. Documents are crucial to show and prove that transactions and events have been carried out properly. This control is imperative to show the accuracy and reliability of accounting records, as well as effectively keeping the processes involved absolutely transparent.
One of the most important aspects of internal controls is that it successfully establishes responsibility. When a given task is carried out by just one person it is easiest for this type of control to be most effective. Also part of establishing responsibilities is authorization and approval of transactions. Within the label of “internal controls,” another part is segregation of duties. This is a critical part. There are two common applications of this aspect. Firstly, separate individuals should be responsible for related activities.
Second, record keeping methods for all assets should be far removed from “physical custody,” which means that a person should not be charged with keeping records as well as being the sole person in possession. The general idea of there being segregation of duties is that having several people responsible for large and complicated activity increases the potential for mistakes. Controls over physical, mechanical, and electronic components are equally as important as the previous sections of internal controls discussed. These measures of action nhance the accuracy and reliability of the accounting files recorded and as well as safeguard assets. The internal verification control, yet another aspect of internal controls, involves the review of data prepared by employees. This control is especially useful in comparing recorded accounting records with actual current assets. Internal auditors are often assigned the duty of internal verification. These auditors perform a sort of audit, and review the individuals keeping records and departmental activities, to ensure that internal controls are being followed closely.
Recommendations for improvements are given when necessary. This is often the time that fraud is discovered. Therefore, this control can potentially prevent a financial loss within a company. There are some controls that are less of big productions, as the ones previously mentioned. These are bonding, rotation of duties, ensuring time off is taken, and conducting thorough background investigations. These controls are small yet effective measures that a company can take advantage of to help their confidence in knowing that they are awarding themselves the best chance for success.
Bonding employees (who handle cash) help safeguard company assets. Rotating employees and forcing time off will ensure that there is no exhaustion or tedious working, which both lead to mistakes. Last, background checks are considered one of the easiest and most inexpensive tools for a company to guard themselves against fraud and theft. This nearly fail-proof method is a way to catch anyone at the application level who may have shady behavior in their past, as well as criminal behavior. Many variables can affect the effectiveness of internal controls of a company.
Most businesses and corporations create their own system of controls, so they need to consider the practicality of each control, in that some controls may not be cost-effective for certain organizations. Based on number of employees, annual net income, and geographic reach, some internal controls may not be logical to carry out. If a particular control has greater negative effects, such as cost, than benefits, then it is not worth implementing. In fact, many businesses end up coming to terms with much of the entire system of internal controls being far too costly to put into effect.
One major fact of internal controls, as a whole, that should be contemplated is that they are implemented, maintained and managed by human beings. Human beings are capable of making errors, even if that means looking over another human’s errors and missing them. Many factors lead to human error, including fatigue, carelessness, and simply not caring. Therefore, it is important to hire and trust the employees who are placed in such positions as important as those in charge of these operations.
In conclusion, the vast web of possibility that is the internal controls system are necessary to easing concerns and worries of business, corporations, companies, as well as protecting all their shareholder’s assets. Internal controls also legally ensure that companies follow certain protocols to provide accurate accounting records. References Investor Words. (2010). Asset. Retrieved 5. 4. 2013 from http://www. investorwords. com/273/asset. html Sarbanes-Oxley Act 2002. (2006). A Guide To The Sarbanes-Oxley Act. Retrieved 5. 4. 2013 from http://www. soxlaw. com/
Cite this Uop Xacc Week 8 Internal Controls
Uop Xacc Week 8 Internal Controls. (2016, Oct 07). Retrieved from https://graduateway.com/uop-xacc-week-8-internal-controls/