| In this day and age, it is mandatory that | | | | organizations to maintain proper documentation. |
| organizations have effective internal control | | | | This is to provide evidence that financial |
| policies and procedures. After taking Accounting | | | | statements are accurate. To insure the records |
| 201 and being in the work force, I've learned | | | | are adequate, the use of prenumbered, |
| about the Sarbanes-Oxley Act which was passed | | | | consecutive documents is adequate. |
| in 2002. This piece of federal legislation requires | | | | 3) Insure assets, bond key employees and |
| that management and auditors adhere to or | | | | separate recordkeeping from custody of assets - |
| perform specific tasks in order for organizations | | | | Assets are anything of value a company owns |
| to maintain their internal control responsibilities. | | | | including cash. To insure physical assets, the |
| This legislation was a result of the Enron | | | | individual responsible for asset recordkeeping |
| Corporation and Arthur Anderson accounting firm | | | | should not be the individual that is responsible for |
| to close down and go out of business due to | | | | the physical control of that asset. Having different |
| weak internal controls. These "scandals" were | | | | individuals separate these functions creates a |
| highly publicized. | | | | system of checks and balances, also known as |
| The basics of internal controls are to protect the | | | | segregation of duties. The bonding of key |
| company's assets; ensure reliable accounting; | | | | employees is accomplished by purchasing |
| promote efficient operations; and establish | | | | insurance on that employee and will cover the |
| adherence to company policies. This is | | | | organization if a loss were to occur. |
| accomplished by an organization establishing | | | | 4) Divide responsibility for related translations - |
| principles of internal controls. Essentially, these | | | | This is also known as segregation of duties. This |
| principles appear to be practical to most individuals, | | | | item requires that different individuals are assigned |
| however it is necessary to have policies and | | | | responsibility for different parts of related |
| procedures in writing so that all employees are | | | | transactions, in particular those involving |
| aware of these procedures, particularly those who | | | | authorization, custody or recordkeeping. For |
| handle cash, checks and credit card payments. | | | | example the individual approving a purchase order |
| When this law went into effect, the first piece of | | | | should not be the individual cutting the physical |
| information requested by the independent auditors | | | | check. |
| that year was to provide the documentation of | | | | 5) Apply technological controls - Technology is a |
| the Internal Controls. | | | | valuable tool for internal controls. Many computer |
| There are several principles for internal controls as | | | | systems are designed for individuals to have |
| stated in Financial Accounting Fundamentals, 2009 | | | | specific privileges which are necessary to |
| Edition by John J. Wild: | | | | complete their own job tasks. For example, the |
| 1) establish responsibilities and create specific | | | | employee enter a purchase order into the |
| policies and procedures; | | | | computer software will not have menu access to |
| 2) maintain adequate records; | | | | prepare a check to the vendor. Another part of |
| 3) insure assets, bond key employees and | | | | technology controls would be mechanical controls, |
| separate recordkeeping from custody of assets; | | | | where an employee will need an ID card or will |
| 4) divide responsibility for related transactions; | | | | have specific privileges to enter a building or |
| 5) apply technological controls; | | | | certain parts of a building. |
| 6) perform regular and independent reviews. A | | | | 6) Perform regular and independent reviews - |
| summary of each of the principles is provided | | | | This can be accomplished when a manager will |
| below. | | | | evaluate an employee based on performance. It is |
| 1) Establish responsibilities and create specific | | | | carried out by the manager who did not do the |
| policies and procedures - It is important to | | | | work being checked. This will help insure the |
| establish clear responsibilities and duties to | | | | reliability of accounting information and the |
| individual employees, in particular those that work | | | | efficiency of the operations. For example, the |
| in a finance departments. For example, the person | | | | supervisor verifies the accuracy of a retail clerk's |
| that handles petty cash should not be the one | | | | cash drawer at the end of their shift. This may |
| writing the check to replenish the funds. Another | | | | be reviewed by an internal auditor to be sure the |
| example is the person placing an order for | | | | manager is doing his/her job as well. |
| material, supplies; office equipment should not be | | | | Finally, there are some limitations on internal |
| the one approving the purchase order. Proper | | | | controls. Effective internal controls can provide |
| authorization for the above transactions is | | | | reasonable assurance that the objectives of the |
| necessary. So there is clear separation of duties | | | | organization are met. Reasonable assurance implies |
| throughout the various areas in a finance | | | | that the costs of internal controls must not |
| department. | | | | exceed their benefits. |
| 2) Maintain adequate records - It is necessary for | | | | |