Tonya has a Master of Science degree in Accounting.
In this lesson, we'll learn about internal controls in managerial accounting. Internal accounting controls govern a company's financial system, and are important when it comes to safeguarding a company's financial information.
After such scandals as Enron and Tyco, everyone asked the same, perhaps infamous, question: 'How could this have happened?' These companies had accountants and auditors, so how is it possible that fraud occurred? The answer can be summed up in two simple words: internal control.
Internal controls can be broadly defined as everything that controls risks to a company. In order to accomplish this, there are a few general objectives of internal controls:
Safeguard assets: This means protecting the company's tangible and intangible assets from misuse, fraud, and theft.
Prevent and detect fraud: This can show any discrepancies that might be the result of fraud. It helps abnormalities to stand out.
Accurate financial records: This ensures that all accounting transactions are recorded correctly and timely, and that all cost and revenue has been reported.
Since the expenditures in a company can greatly affect the financials, you want to have strong internal controls in place.
To safeguard the purchasing environment you need to have a strong process and segregation of duties. In order to achieve this, all purchases should be approved by a manager. In addition, someone from the Purchasing department should place the order and the manager should approve the invoices for payments. Finally, someone from Accounts Payable should enter the invoice after the manager's approval.
Inventory is usually one of the largest expenses for a company. Because of this, it's very important to protect your inventory. You can track your inventory by maintaining a listing of exactly what's in your inventory with a tracking number so that you know if something is missing. In order to keep your inventory secure, use specialized locks, security codes, and limited access to inventory. In addition, it's a good idea to audit your inventory by periodically doing a full count to ensure the listing is correct.
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As we all know, cash is very important and must be protected. This can be accomplished in a number of different ways, including the segregating duties, requiring dual signatures, reviewing authorized signers, and reconciling bank accounts. The segregation of duties can include things like making sure the person who signs the check is separate from the person who records the transactions. Additionally, the person who has custody of blank checks should be separate from both the signer and the records recorder. Dual signatures means that checks over a certain amount must have two separate signers. Reviewing authorized signers involves limiting who has the authority to sign checks and then reviewing this limitation often. Finally, having independent person reconcile the bank accounts so that all transactions can be reviewed is the cornerstone of sound bank account reconciliation.
It's very important to safeguard your employee's information and protect the company's financial resources. Here are some things that can be done to safeguard information.
Separate the ownership of data, record keeping, approval, and reconciliation.
Compare one payroll period to another, using payroll variance reports.
Have more than one person review and approve payroll disbursement.
Have both the employee and the manager approve time sheets.
Lock checks in a secure location.
Immediately remove terminated employees
Encourage direct deposits.
In this lesson, we learned about the importance of internal controls. Internal controls help to safeguard a company's assets, prevent and detect fraud, and provide accurate financial statements. If you have strong internal controls in purchasing, inventory, cash, and payroll, you have a much better chance of success.
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