Day 161 Internal Control

Internal Control

Accounting is a subject dealing directly with money, therefore there is high possibility for participants use their position and opportunity to commit a fraud. In order to prevent that as well as the employee’s theft, most companies implemented the internal control system, as to safeguard its asset and enhance the quality of its financial reports. 

There are six major principles of establishing internal control in the company. Firstly, is the determination of responsibility. In this section, each employee should be assigned with a specific responsibility, hence if something goes wrong the person obligated to it would be clear. Other allocations of responsibility includes the authorization and approval of transactions. For instance, the manager should be given the authority to record sales return, so it would prohibit employees to unfaithfully use this opportunity to gain personal benefit. In addition, the segregation of duty is also a important factor. It is also named as the separation/division of work, since the principle is generally carried out with following two procedures: related activities should be assigned to different people, and the recording of assets should not be assigned to the same individual who is responsible to safeguard it. Furthermore, the company should introduce a systematic documentation procedure, which provides evidence of transactions and events. Techniques such as pre-numbering the documents, immediate transfer the source document to accounting department, and using different color for copied files will contribute on reducing the chance of error or irregularities by employees. Moreover, the physical, mechanical and electronic controls seem to be one of the best options for company to safeguard their asset and controlling employees’ misbehavior. In fact, the employee monitoring system is a good example for these controls. Besides that, the independent internal verification on periodically or surprise basis can efficiently improve the internal control inside a company. This person who is taking the evaluation should be separated from the duty being inspected. Any exceptions found under scrutiny should be reported to the manager, so correction procedure can be performed. 

At last, there are still plenty other control methods such as: job rotation, proper training about the internal control or adequate wages corresponding to duties. We should comprehend it not only because it is a crucial part as management accounting, but also it is examinable material!!!