Topic 6: Internal Control Flashcards
What is the definition Internal Control?
The representation of the procedures and processes in place within a business designed to ensure effective and efficient operation and achievement of the business’s objectives.
What are the 5 limitations of establishing Effective Internal Controls?
- Human involvement
- Collusion
- Costs outweighing Benefits
- Business being too small to employ extra staff
- Computer Fraud
Explain the limitation “Human Involvement”
It is the idea that internal control systems will only be as effective as the behaviour and dedication of involved employees.
Explain the limitation “Collusion”
When two or more people come together to commit fraud.
Explain the limitation “Costs may Outweigh Benefits”
When introducing internal control procedures costs may outweigh benefits as control measures, impact on staff, customers and business operations must be considered for the total cost.
Explain the limitation “Business is too Small to Employ Extra Staff”
If the business is too small to employ extra staff some internal control procedures will not be able to be implemented.
Explain the limitation “Computer Fraud”
Due to most businesses using computer accounting systems, computer fraud is difficult to detect due to usually only one person operating the systems.
What are the 8 fundamental principles of Internal Control?
- Segregation of Duties
- Established lines of responsibility
- Security of assets
- Mechanical and electronic devices
- Records and Documentation
- Verification and checking processes
- Authorisation processes
- Competent and reliable staff
Explain the principle “Segregation of Duties”
An element of a good internal control system that consists of the various tasks, activities and functions of a business. These tasks should be divided up so that no one person has complete control over them, reducing the likelihood of fraud and increasing the probability of accurate accounting records.
Explain the principle “Established lines of Responsibility”
An organisational structure that has clear lines of responsibility and is essential for effective internal control. The tasks/functions must be determined and then assigned to varying positions in the business. This allows the staff to know what they are expected to do and what they have been given the authority to carry out, showcasing exactly what they are accountable for.
Explain the principle “Security of Assets”
Conveys the importance of these assets to a business’s operation and overall success. Assets are used to generate cash flow and income streams for a business and are therefore vital for their success. Usually, they can be the target for thieves and embezzlers, leading to the necessity of their protection.
Explain the principle “Mechanical and Electronic Devices”
Ensures the security of assets, the accuracy of record-keeping and mechanical/electronic devices can be installed resulting in the “human element” being eliminated out of the process.
Explain the principle “Records and Documentation”
All transactions, financial events, assets and liabilities must be documented and/or recorded. These will ensure the protection of all valuable assets and ensure all financial reports are reliable. To increase productivity, systems should be implemented to process the data into useful information for decision-making purposes.
Explain the principle “Verification and Checking Processes”
Ensures that all accounting records/reports are correct and either external or internal verification of these records should take place whenever available. Processes should also be available for the independent checking of specific information from the accounting system.
Explain the principle “Authorisation Processes”
The processes authorising transactions or financial events by a person with the ability to do so in a management structure. The authorisation must be valid according to the established business policy. The authority given must be clearly determined and set out in either a procedures manual or job description document.
