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¾ Internal control consists of the policies and procedures within an organization that
help achieve the following objectives:
1. Optimize the use of resources to reduce inefficiencies and waste
2. Prevent and detect errors and irregularities in the accounting process
3. Safeguard assets from theft, robbery, and unauthorized use
4. Maintain reliable control systems to enhance the accuracy and reliability of accounting
Principles of Internal Control
¾ Authorization of Transactions and Activities: Control is most effective when only
one person is responsible for a task
¾ Segregation of Duties: Related activities should be assigned to different individuals
and establishing the accountability (keeping the records) for an asset should be
separate from the physical custody of that asset. When one individual is responsible
for all of the related activities, the potential for errors and irregularities is increased.
When one employee (the accountant) keeps the records of an asset, and a different
employee (the custodian) keeps the asset itself, the employee who keeps the asset is
unlikely to use it dishonestly.
¾ Documentation Procedures: Documents provide evidence that transactions and
events have occurred. Documents should be prenumbered and all documents should
be accounted for. Documents that are source documents for accounting entries should
be promptly forwarded to the accounting department. This control measure helps to
ensure timely recording of the transaction.
¾ Safeguarding Assets and Records: Physical, mechanical and electronic controls are
needed to adequately control access to, and use of assets and records: Physical
(locks), mechanical (alarms), and electronic (passwords).
¾ Independent Verification: To obtain maximum benefit from independent verification:
The verification should be done periodically or on a surprise basis, it should be done
by someone who is independent of the employee responsible for the information,
discrepancies and exceptions should be reported to a management level that can take
Internal Verification: A common process which is similar to the
reconciliation of cash balance and banks. It is to make sure that the numbers
in the books match reality. This is usually done by internal auditors
External Verification: The companies hire external auditors to verify the
¾ Bonding of employees who handle cash: involves obtaining insurance protection
against misappropriation of assets b\GLVKRQHVWHPSOR\HHV5RWDWLQJHPSOR\HHV¶
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