Internal Controls

Question 1

Define Internal Controls

Answer 1

Internal Controls refers to the overall methods and procedures which a business adopts in order to ensure that:
- Assets are safeguarded
- Correct procedures, policies, regulations and laws are adhered to
- Financial reports and records are valid
- Continual improvement of the effectiveness and efficiency of business operations are assured.

Question 2

Internal Controls over cash

Answer 2

-> Cash must be banked either at the end of each day, weekly or depending on how large the amounts are.

-> Cash should be counted in a secure area where the person is free from interruptions.

-> All cash receipts should be recorded on a cash receipt, cash register or a properly controlled computer database at the time of receipt.

Question 3

Internal Controls over inventory

Answer 3

-> Either utilizing the Just In Time procedures, or setting maximum and minimum levels or stock, or using online ordering.

-> Keeping track of profit margins, as well as competitors’ prices.

-> Security procedures whether it be implementing security guards, gates, random staff checks or cameras.

Question 4

Internal Controls of non-current Assets

Answer 4

• Regular security checks
• Use of an asset register
• Insuring all assets adequately
• Tagging and numbering all assets

Question 5

Internal Controls over accounts payable

Answer 5

• Keeping a positive relationship and open communication line with the creditors.
• Taking advantage of discounts for early payments
• Using a computerised accounting system to keep track of deadlines.

Question 6

Internal Controls of accounts receivable

Answer 6

• Issuing invoice on a timely basis
• Follow up delinquent accounts regularly to facilitate payments
• Setting up and following a specific set of procedures fore determining bad debts and collection actions.

Question 7

Limitations of Internal Controls

Answer 7

• People in management, such as the owner of the business, can override a control resulting in a vulnerable system.
• A lack of staff will lead to some difficulties in segregating duties properly
• Human error can result in inaccuracies affecting an internal control system being not as effective.