Internal Control

What are internal controls?

Are the procedures that are designed to protect the assets of the business, to prevent fraud and to enhance the efficiency and reliability of accounting records.

Principles of Internal Control

Segregation of duties – duties of employees are separated so that any one employee is not allowed to combine certain job tasks.

Established lines of responsibilities – tasks and functions (who does what) of the business must be clear

Authorisation process - transactions and purchases must be authorized by appropriate people

Security of Assets – all must be protected, and accurate records of all assets must be kept

Mechanical and electronic devices are installed – e.g. security cameras and accounting systems

Competent and reliable staff are employed –screening

Recording and documentation systems must be in place. E.g. record of inventory and record on all non-current assets.

Verification and checking process in place – e.g. second signature on authorizing payment.

What are internal controls?

Are the procedures that are designed to protect the assets of the business, to prevent fraud and to enhance the efficiency and reliability of accounting records.

Principles of Internal Control

Segregation of duties – duties of employees are separated so that any one employee is not allowed to combine certain job tasks.

Established lines of responsibilities – tasks and functions (who does what) of the business must be clear

Authorisation process - transactions and purchases must be authorized by appropriate people

Security of Assets – all must be protected, and accurate records of all assets must be kept

Mechanical and electronic devices are installed – e.g. security cameras and accounting systems

Competent and reliable staff are employed –screening

Recording and documentation systems must be in place. E.g. record of inventory and record on all non-current assets.

Verification and checking process in place – e.g. second signature on authorizing payment.

Internal Control over Non-Current Assets

Separation of Duties	purchasing of non-current assets approval of invoices for payment maintaining the non-current asset register tasks should be separated if possible
Authorisation process	Only senior Management  should authorize and sign off on Purchase of new assets Disposal of old assets
Security of Assets	Asset register – records every asset held by the business Barcoding and engraving Protection of documents related to asset
Mechnical and electronic devises	Security cameras and alarm systems
Competent and reliable staff are employed	Screen staff responsible – employment checks , police clearance
Record systems	Asset register – Assets should be physically counted once a year and asset register should be compared with general ledger

Internal Control over Cash

Separation of Duties	Separate duty of handling cash with recording cash so that staff do not make false entries
Authorisation process	Senior management to approval of payments, use of electronic fund transfer, signing of cheques by 2 people
Security of Assets	Document cash received and cash payment made, daily banking ( no cash left on premises over night reduces theft)
Mechnical and electronic devises	Security cameras and alarm systems
Competent and reliable staff are employed	Screen staff responsible – employment checks , police clearance
Record systems	Accounting systems e.g. general journal to accurately record cash payments received and paid,
Verification and checking	Checking credit card signatures and expire dates, daily mail is opened by 2 people

Internal Control Over Inventory

Separation of Duties: Handling of inventory should be separated from the recording of inventory ( to prevent theft)

Authorisation: Only authorized staff to order inventory

Security of Assets: Inventory should be stored in a secure location with restricted access including the use of security cameras etc

Records systems: The inventory records should be maintained using the perpetual inventory system – identifies fast moving stock and can reduce the risk of running out of stock

Verification and checking: Inventory received should be checked against tax invoice

Internal Control over Accounts Receivable

Separation of Duties: Recording of debtors should be separate from handling payments received

All activities related to managing accounts receivable must properly authorized and accurately documents.

Review debtor accounts monthly and follow up with overdue letters or make follow up phone calls to personally encourage payment

Send tax invoice and statements promptly to encourage payment

Offer discounts for prompt payments

Conduct credit checks before extending credit to new clients

Minimise credit limits for new customers or deny existing customers further credit if payment not made

Internal Control over Accounts Payable

Separation of Duties: recording of a credit transaction should be separate from the handling of cash – so no false entries can be made.

Authorisation:  All payments should to creditors should be made by cheque and approved by a senior employee

Verification: Check all orders made are consistent with invoices received.

Pay invoices on due date to avoid late payment fees.

Don’t pay invoices earlier than the due date, so cash can be retained

Set limits on orders to avoid large invoice bills that can cause strain on cash reserves.

Contact suppliers and negotiate new extended payment terms.

Limitations of internal control

Lack of Segregation of Duties:
Small businesses usually have fewer employees, making it difficult to separate responsibilities such as authorisation, custody, and recordkeeping. This increases the risk of errors or fraud going undetected.

Limited Resources:

Many small businesses can’t afford advanced security systems so their control systems may not be as strong or thorough. Also the controls need to be cost effective – cost may outweigh the benefits e.g. security system more expensive than some inventory being stolen)

Overreliance on the Owner or Key Individuals:
Many small businesses depend heavily on the owner or a few key employees. If these individuals are unavailable or act unethically, the entire control system may be compromised.

Informal Procedures:
Internal controls in small businesses are often based on informal or undocumented procedures, making them harder to enforce consistently and evaluate for effectiveness.

Conspiracy - Employees can conspire to commit fraud together (collusion)

Human Error Can Still Happen: Even with good systems, people can still make honest mistakes. No internal control system can completely stop human error from happening.