All businesses, whether they are corporates or SMEs, need some level of internal control over their finances to ensure they stay on the right side of the law. As well as ensuring the efficiency and accuracy of accounting and financial reporting, internal controls, procedures and systems are key to ensuring businesses and their employees deal with their money in a legal and responsible way.
Within accounting, there are seven internal control procedures that need to be followed to ensure a business’s finances are fully legal and compliant. This article will explain more about internal control systems and how you can ensure your accounts meet their requirements, starting with the definition of internal control.
What is internal control?
To ensure a business’s finances are being run correctly and legally, a set of internal controls are put in place. As well as making sure each set of accounts are legal and compliant, internal controls give out policies and procedures in place to protect an organisation’s assets and ensure any individuals operate within the laws, regulations and ethics of a company.
Primarily, internal controls are put in place within the structure of an organisation to minimise any risks to the company, reduce the number of errors and ensure operations run effectively according to any set rules or regulations. The larger an organisation is, the larger the internal control system that needs to be in place to ensure its operations are fully compliant.
What is an internal control framework?
An internal control framework is a set of processes a business has in place to ensure all of its operations, specifically its financial operations, comply with laws and regulations. A thorough and effective internal control system will enable a company to perform effectively while ensuring its finances and accounts are run with full integrity.
Within larger organisations, an internal control framework will include processes and procedures that cover all stages and levels of the business, from the board of directors to junior employees. Stages within the internal control framework may include IT regulations, controls around asset protection and rules for individual employees to protect the organisation against theft and fraud.
In these companies, there is usually a team of internal auditors whose role is to oversee these processes and procedures to ensure they’re functioning effectively without reducing the overall efficiency of an organisation. There may even be internal control in auditing teams to ensure complete compliance and integrity.
Internal control examples
Internal control in auditing and accountancy are the most common examples seen in all sizes of businesses. To ensure a company’s finances are fully compliant and follow all laws and regulations, there are seven internal controls that can be put in place:
Separation of duties: this involves giving jobs within the accounting process to different employees. This can include critical tasks being reviewed by colleagues or having specific duties, such as bookkeeping and deposits, being designated to different employees within a team.
Accounting system access controls: to minimise the likelihood of fraud or errors, businesses can control accounting systems via restricting access via different user accounts, passwords and electronic logs. This also enables businesses to track and monitor access to the accounting system.
Physical audits of assets: from hand-counting cash to taking inventories of equipment, counting assets physically gives extra reassurance and ensure there’s no discrepancies in account balances and electronic records.
Standardised financial documentation: by having a system and template for invoices, internal request and expense reports, companies can ensure there’s consistency within their record keeping and reduce the likelihood or errors or discrepancies to appear.
Daily or weekly trial balances: by running trial balances on a regular basis, companies can gain insight into the status of their system and ensure any discrepancies are picked up and dealt with as early as possible.
Periodic reconciliations in accounting systems: similar to trial balances, reconciliations ensure balances match up across different systems, banks, suppliers and customers. Any errors or discrepancies can then be revealed quickly and easily.
Approval authority requirements: assigning particular managers the responsibility of authorising specific types of transactions adds an extra layer of control and reduces the likelihood of errors or fraudulent claims.
Although these seven internal controls may not be used in all types of businesses, they’re an example of the types of internal control systems that can be put in place to ensure a company’s finances are compliant and lawful.
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