Internal controls basic principles

What is the purpose of internal control?

To prevent fraud, safeguard assets, and ensure efficient operations.

List the four aims of internal control.

Safeguard assets

Ensure compliance with policies and laws

Validate financial reports

Improve efficiency and effectiveness

What is verification in internal control?

Checking the accuracy of accounting records by independent means.

Why is separation of duties important?

Prevents fraud by ensuring no single employee controls multiple steps of a process.

What is serialisation in internal control?

Numbering all source documents consecutively for tracking.

What are administrative controls?

Office practices that prevent fraud, like separating employee duties.

What are accounting controls?

Procedures to protect assets, such as verifying tax invoices before payment.

Give two common internal control rules.

Employees' duties should be separated.

Decision-making power should be limited.

Why should cash handling and recording be separate?

To reduce the risk of fraud and errors.

What are three internal control procedures for cash?

Separate cash handling from recording transactions.

Bank all cash receipts daily.

Require senior approval for payments above a set limit.

What are three internal control procedures for inventory?

Store inventory securely with restricted access.

Check deliveries against orders before storage.

Use a perpetual inventory system and insure inventory.

What are three internal control procedures for accounts receivable?

Send monthly statements to debtors.

Require senior approval for bad debt write-offs.

Review overdue accounts regularly and follow up with customers.

What are three internal control procedures for accounts payable?

Verify invoices with purchase orders before payment.

Require senior approval for payments.

Separate cash handling from recording transactions.

How should non-current assets be controlled?

Senior employees approve purchases/sales.

Maintain an asset register with regular inspection checks.

Ensure assets are insured and store title deeds securely.

List two limitations of internal control.

Small staff size limits duty segregation.

Human error can reduce effectiveness.

What happens if 2 or more employees conspire to commit fraud?

The internal control system may not detect it.