The control principles of a company are the regulations that require the existence of procedures and processes established in accounting systems to help managers supervise and regulate business activities, thus ensuring that company assets are protected.
The objective of the control principles is to ensure that the accounting system works properly and that business events are accurately recorded. Obviously, managers cannot supervise all employees, so there is a possibility of some mistakes or some fraud happening.
To identify and establish effective controls, management must continually assess risk, monitor implementation of the control, and modify controls as necessary..
Having such an essential business function provides reasonable security by reducing the likelihood of errors and safeguarding the organization's assets. Due to its importance, companies should consider the fundamental principles of control.
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The management style and expectations of senior managers, in particular their control policies, determine the control environment.
In a control environment there is additional supervision carried out by a management committee, which ensures that there is administrative integrity, ethical values, a well-defined organizational structure and competent and reliable employees, assigning authority and responsibilities..
They are specific policies and procedures that management uses to achieve its objectives. These include the following:
Requires different people to be assigned responsibility for performing different tasks in related activities, particularly those involving authorization, custody, or record keeping.
By requiring different people to perform these functions, a balanced system of control is created.
Helps ensure that all company activities comply with established policies and guidelines.
Requiring certain managers to approve certain types of transactions adds an additional commitment to the accounting records, by demonstrating that the transactions have been analyzed and approved by the appropriate authority..
It includes the creation of invoices and other documents that are easy to use and sufficiently informative, the use of pre-numbered and consecutive documents, and the timely preparation of documents..
Standardization makes it easy to review old records by looking for the source of any discrepancies in the system. Lack of standardization may cause some items to be overlooked or misinterpreted in such a review.
They are electronic or mechanical controls (safes, identification cards, fences, cash registers, video cameras, locks) or computer controls, related to access privileges or established backup and recovery procedures..
Technology can generally go where people can't, and you can be on the job 24 hours a day without the need for extra pay.
Controlling access to an accounting system through passwords, locks, and electronic access logs keeps unauthorized users out of the system, as well as provides a way to audit system use to identify sources of errors.
Companies must periodically review their control systems. This should be done by someone who has not done any of the work to be verified.
These reviews help to ensure the reliability of accounting information and the efficiency of operations..
The company must clearly establish responsibilities. Assigning specific responsibilities to people ensures they understand their role in staying in control.
If responsibility is overlooked, an effective monitoring system will make it clear who is not performing an assigned task.
All these controls meet the objectives of the control principle. After the controls are up and running, managers don't have to monitor each employee's activity. They can periodically review controls to make sure they are working properly and focus on running the business.
It is a good control to ensure that record keeping functions are separate from actual cash handling.
For this reason, the cashier is in charge of collecting cash from customers, with the possibility of depositing it in the bank, and the accounting department is in charge of recording these cash receipts and making bank reconciliations..
In this way, a single person cannot take the client's money and misappropriate it, later covering up with fraudulent accounting.
If two people do these jobs, the only way fraud can work is if each person is in complicity with the other. Obviously, two complicit employees are much less likely than a single employee to steal..
Requiring approval to be able to make large expense payments can prevent unscrupulous employees from making large fraudulent transactions with company funds.
An official price list serves as an approval to the sales staff to sell at these prices. In addition, there may be a control that allows the sales manager to authorize reasonable changes to the price list..
Mandatory employee turnover or vacation period is implemented to detect fraudulent schemes where it is required to have a regular system to maintain it.
If the accountant changes responsibilities every two months, one person will not be able to consistently run a rogue system.
Physical audits include manual counting of cash and any other physical assets recorded in the accounting system, such as inventories..
Physical counting can reveal hidden discrepancies in account balances by completely bypassing electronic records. Cash counting at points of sale can be done daily or even several times a day.
Larger projects, such as physical inventory, need to be done less frequently, perhaps annually or quarterly.
They guarantee that the balances of the accounting system coincide with the balances of the accounts of other entities, such as banks, suppliers and customers.
The differences found between these types of complementary accounts may reveal discrepancies in the own accounts, or that the errors originate in the other entities.
They are probably the most common internal controls because they not only protect the company, but increase its efficiency.
Automated time clocks are a good example. Employees are checked by these clocks when they arrive and then checked at the end of their shift.
Automated time clock eliminates the possibility of employees cheating with their working hours.
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