TCO 5 Internal Control Procedures Are In Place To Protect

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Internal control procedures are essential mechanisms implemented within a business to safeguard assets, ensure accurate financial reporting, and promote operational efficiency. These controls help prevent fraud, theft, and errors, thus maintaining the integrity and reliability of a company's financial and operational activities. In this context, understanding and applying specific internal control procedures is vital for effective asset protection. This paper discusses five of the seven common internal control procedures, detailing how each is implemented within a typical business environment.

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1. Segregation of Duties

Segregation of duties involves dividing responsibilities among different employees to reduce the risk of error or fraud. For example, the employee responsible for recording transactions should not be the same person who handles cash or physical assets. Implementation includes assigning different tasks such as authorization, custody, and recording to separate individuals. This internal control prevents any one employee from having complete control over the entire process, thereby reducing opportunities for misappropriation or mistakes.

2. Authorization of Transactions

This control requires that all transactions be approved by a designated person with proper authority before they are executed. Implementation includes establishing clear approval thresholds and procedures. For instance, purchases above a certain amount might require managerial approval. This process ensures that all transactions are valid, necessary, and within company policies, reducing the likelihood of unauthorized or fraudulent activities.

3. Physical Controls

Physical controls safeguard assets like cash, inventory, and equipment from theft or damage. Examples include safes, locked storage facilities, security cameras, and alarms. Implementation involves securing physical assets and restricting access to authorized personnel only, along with periodic inventories and asset counts. These measures make it more difficult for unauthorized individuals to access or steal assets and enable detection of discrepancies in asset levels.

4. Reconciliation and Monitoring

This procedure involves regularly comparing financial records with physical assets and bank statements to identify discrepancies promptly. For example, bank reconciliations are performed monthly to match company records with bank statements. Implementation also includes internal audits and managerial reviews of reports. Continuous monitoring helps detect errors, omissions, or fraudulent activities early and ensures that controls are functioning effectively.

5. Documentation and Recordkeeping

Maintaining comprehensive documentation of transactions, policies, and procedures is crucial for accountability and audit trail purposes. Implementation involves using approved forms, records, and logs for all activities, from purchase orders to sales transactions. Proper recordkeeping facilitates transparency, supports internal and external audits, and provides evidence in case of disputes or investigations.

References

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  • Singleton, T. W., & Singleton, A. J. (2019). Fraud Auditing and Forensic Accounting. John Wiley & Sons.
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