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Internal controls.

Internal control over operations is an important part of any well-run business. Internal control is defined by SAS 55 as "the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved." In other words, a company should have policies and procedures to direct operations in order to accomplish organization goals.

Goals may be both financial and non-financial. An example of a non-financial goal is the development of new products through research. A related financial goal would be to reduce other costs to provide funding for the research. Proper controls over expenditures and proper use of assets would, therefore, be the means of accomplishing these goals.

Internal control is further defined as having three elements: the control environment; the control procedures; and the accounting system.

The control environment consists of the management's operating style, the organizational structur of the business and personnel policies. If management both establishes and adheres to effective control procedures, then the importance of proper controls is commmunicated throughout the company. The organizational structure of the company provides a framework for operations. For example, an enterprise may be divided into various department, with each department head given full authority in establishing that department's operating activities. Personnel policies include training, promotion and compensation of employees plus any additional guidelines deemed necessary to accomplish the company goals. This could include an item such as a conflict of interest policy.

Control procedures are those actions necessary to provide reasonable assurant that goals will be met. Some examples of control procedures are separation of duties, rotation of employees, proper authorization policies and appropriate security measures. Of course, the larger the company, the easier it is to put these procedures in place. There will be adequate personnel to allow for both segregation of duties and rotation of employees.

Jobs can be assigned in such a way that the work of one employee automatically provides a cross-check on the work of other employees. This allows for prompt detection of errors or of any irregularities. In a retail sales enterprise, new inventory would be ordered by a buyer, the receipt of the inventory would be recorded by the accounting department and the inventory would be logged in by a receiving department. In a sole proprietorship or a small partnership, the owners are usually present and will have a direct hand in overseeing the work. They are providing the internal controls. In a small company where this type of segregation is not possible, an adequate system of checks and balances must be in place.

Authorization procedures provide assurance that transactions have been properly authorized, usually by management personnel. In the retail sales operation, any purchase of new inventory would have to be authorized by the buyer. The accounting department woudl verify that authorization when recording the purchase. They would also verify that the merchandise had been received. This provides a system of cross-checks.

Access controls involve both direct physical access and indirect access through various documents. Physical access can include on-site safes and bank deposit vaults for receipts and valuable records. Storerooms provide physical access control for parts and inventory. Indirect access control consists of a system of vouchers and sales slips and the related accounting records. Using an authorized voucher to obtain parts from a locked storeroom is an good example of access control through both direct and indirect means.

An accounting system provides the information necessary for directing operations and for planning. It is an integral part of the internal control structure. SAS 55 presents a very clear and understandable definition of an accounting system.

The accounting system consists of the methods and records established to identify, assemble, analyze, classify, record and report an entity's transactions and to maintain accountability for the related assets and liabilities. An effective accounting system gives appropriate consideration to establishing methods and records that will:

* Identify and record all valid transactions.

* Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions for financial reporting.

* Measure the value of transactions in a manner that permits recording their proper monetary value in the financial statements.

* Determine the time period in which transactions occurred to permit recording of transactions in the proper accounting period.

* Present properly the transactions and related disclosures in the financial statements.

An accounting system must both meet the particular needs of the business entity and be cost effective. A report should not cost more than the benefit it provides. Accounting systems must be flexible and capable of changing with growing demands. An accounting system must provide information for owners as well as other interested parties. Users of an accounting system must be provided with the data necessary to make decisions. An accounting system, as stated above, plays a major role in internal control by providing a system of checks and balances to assure achieving the company's goals.
COPYRIGHT 1992 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Accounting Scene
Author:Schwartz, Marlyn A.
Publication:The National Public Accountant
Article Type:Column
Date:Mar 1, 1992
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