Chapter 5:Monitoring business and accounting systems
Internal control system is the whole system of controls,financial and
otherwise,established by the management in order to carry on the business of the
enterprise in an orderly and efficient manner,ensure adherence to management
policies,safeguard the assets and secure as far as possible the completeness and
accuracy of the records.The individual components of an internal control system
are known as controls or internal controls.
These are eight types of internal control listed.One way of remembering them is
use the mnemonic SPAM SOAP.
-Segregation of duties.Executive tasks should be separated from control tasks.
One of the prime means of control is the separation of those responsibilities or
duties which would, if combined,enable one individual to record and process a
complete transaction.Segregation of duties reduces the risk of intentional
manipulation or error and increases the element of checking. Some functions
should be separated whenever possible. For example, authorisation, execution
and custody. An example of segregation of duties concerns the receipt, recording
and banking of cash. It is not a good idea for the person who opens the post to be
the person responsible for recording that the cash has arrived. It would be even
poorer practice for that person to be responsible for taking that cash to the bank.
If these duties are not segregated, there is always the chance that the person will
misappropriate or steal the cash and no-one would know.
-Physical controls.These are concerned with the custody of assets and records
and are also concerned with ensuring that access to assets and records is only
permitted to authorised personnel. Procedures and security measures are
needed to ensure that access to assets is limited to authorised personnel. Such
controls include locks, safes and entry
-Authorisation and approval. All transactions should be authorised or approved
by an appropriate responsible person. The limits for these authorisations should
be specified.In a purchasing system there should be authority limits,where
purchases of amounts exceeding those limits require higher authority. -Management controls.Management controls are exercised by management
outside the day-to-day routine of the system.These include the following: overall
supervisory controls, review of management accounts and comparison with
budgets,internal audit function and special review procedures.
-Supervisory controls.Any system of internal control should include the
supervision by responsible officials of day-to-day transactions and the recording
-Organisation as a control.Enterprises should have a plan of their
organisation,defining and allocating responsibilities and identifying lines of
reporting for all aspects of the enterprise’s operations, including the
controls.There must be a well-defined organisational structure showing how
responsibility and authority are delegated. An effective plan would
(i) separation of a company’s operations into appropriate divisions and sub-
(ii) appointment of persons to assume responsibility,
(iii) establishment of clear lines of responsibility between each division and sub-
division and the board of directors,
(iv) overall co-ordination of the company’s activities.
This will help to prevent friction so that staff work together well. It also means
that no duties go un