Internal Controls: Objectives, Types & Risks

• Internal control is a set of control measures and procedures implemented by a company's management
• These measures address the risks involved in achieving the company's objectives

Objectives of Internal Control

• Compliance with laws
• Accurate presentation of information
• Effective and efficient management within the company's financial capacity and resource allocation

Economics in Internal Control

• Minimizing the use of resources

Efficacy in Internal Control

• Using resources appropriately

Efficiency in Internal Control

• Maximizing the use of resources

3 Types of Internal Control

• Physical Controls: Ensuring the protection of assets and employees
• Accounting Controls: Maintaining complete and accurate accounting records and documents
• Management Controls: Ensuring sound management practices and adherence to the "3 E's" (Economics, Efficiency, and Effectiveness)

Types of Risks

• Fraud, theft, loss, breakage, and omission
• These can lead to errors in calculation, writing, and posting

Limits of Internal Control

• Human nature (laziness, procrastination, resistance to change)
• Unexpected events
• Collusion among individuals
• External factors affecting the system

Implementation Rules for Effective Internal Control

• Properly assigning responsibilities and workload among employees
• Separating incompatible tasks such as combining custody of assets with accounting duties
• Providing adequate staff training and employing competent personnel
• Ensuring regular supervision and verification of tasks
• Using technology (IT, electronics, and mechanical systems)
• Properly documenting controls and work performed
• Maintaining adequate records and systems

Analyzing the Company

• Analyze the company system by system
• Identify the risks associated with each system
• Define the controls needed to mitigate the identified risks

Company Systems

• Cash management
• Customer sales
• Supplier purchases

Risks in the various modes of payments

• Risks and controls vary based on payment methods (cash, cards, checks, etc) and must be considered when establishing controls

Risk of Cash Handling

• Risk includes loss, counterfeit money, theft, double counting, incorrect accounting and destruction

Controls for Cash Risk

• Cameras, security personnel and safes
• Keeping limited cash, frequent deposits, and deposits by at least two people at varying times and locations
• A cash register
• Restricting register access to a single cashier and supervisor
• Ensuring visibility of the register display for customers
• Ensuring that there a drop box on the register to limit the amount of cash on hand
• Recording any unusual register openings
• Temporarily leaving received cash on the register, having deposit envelopes signed by supervisors and employee
• Supervisors count deposits before the money is placed in the envelope and counting the cash drawer at the periods end

Controls to Detect Counterfeit Currency

• Inspect and feel the bills
• Provide staff training
• Not accepting large bills
• Using counterfeit detectors

Conversion Controls

• Approving journal entries
• Reconciliation
• Verifying and counting deposits
• Conversion rate integration
• A conversion table
• Exchanging foriegn currency at the current exchange rate

Risks of Checks

• Risk includes non-sufficient funds (NSF), forgery or errors in the check, loss, double accounting, destruction, bad signature and poor imputations

Preventing NSF

• Credit checks
• Certified check requirement
• Requiring guarantees
• Checking a customers repuation
• Providing fees

Prevention of Stolen Checks

• Check list
• Determine responsible individual
• Making copies
• Banking stamps

Controls to Detect Forgery

• Verify information
• Verify it is written on the invoice
• Keeping a list of authorised signers
• Require Identification
• Checks should be preprinted

Controls to Prevent Record Errors

• Correct journal entries
• Bank reconciliation

Risks of Cards payments

• Insufficient Funds and Fraudulent use
• Expired or damaged cards
• Double imputation and cloneing

Preventing Fraud and Missing Signatures

• Point of terminal sale
• Verifying the signature
• Initials
• Identification

Preventing Account Errors and Fraud

• Protecting TVP access
• Relevancy to clients
• Security system
• PIN

Risks of cash disbursement

• Misuse and loss
• Duplicate payments and errors

Checks Risk

• NSF, loss or fraud

Controls for disbursement of cash

• Close security
• Issue paper checks
• Set max fund
• Verify receipt
• Regular ledger

Check controls

• Checking credit history before payment terms are made
• Prepared budget
• Reconcile
• Paying on time

Credit card risks

• Misuse
• Loss
• Fraud
• Embezzlement

Controlling risks

• Limits
• Verify ID
• Itemise

Managing clients

• Credit analysis
• Manage orders
• Preparing orders
• Invoice
• Accounting

Credit Analysis

• Prevents bad debt
• Risk of preventing approved loans

Gathering information

• Info through client authorizations
• ID and finances
• Validate all information

Making judgements

• Ratio and comparisons
• Scoring system

Approve and deny

• Amounts and terms
• Payment and rates

Handling orders

• Prevents losses and duplicates

Risk assessment

• Having a document

Preparing an invoice

• Checks for omissions
• Verify it with receipts

Monitor account

• Check for arrears

Purchases

• Controls access
• Prevent stock loss
• Compare it with inventory

Process Management

• List processeses to prevent bad debt
• Select providers

Placement of order

• Quantities and descriptions
• Dates and rates

Error mitigation

• Double checks
• Authorization
• Comparisons
• Policy agreements

Reception checks

• Prevents missing and undelivered goods

Controls

• Have a receipt
• Compare inventory
• Validate staff

Payment controls

• Verify charges
• Approvals
• Stamp and register