Accounting- Internal control

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The purpose of the system of internal accounting controls is to make sure a business is operating according to the policies and plans of management in regards with measures that have a direct relation to the protection of assets and to the reliability of accounting information. A system of internal control in a business is set up to safeguard the business’ resources against waste or fraud, to guarantee the accuracy of accounting information, to assess performance of the company and to make sure that company policies are being followed.

To attain well functioning internal control, there are certain guidelines that can be used. The first would be to establish clear lines of responsibility. Businesses should assign responsibilities to an individual or a department. Clear descriptions of each department should be recorded to avoid any possible problems later. Each type of transaction should have routine procedures to be followed in order to direct activities of the business as planned, according to company policies. Every transaction should be authorized, approved, executed and recorded. The most important measure to take is probably the subdivision of duties. By making sure that the same person or department does not handle a transaction completely from beginning to end but instead duties are divided amongst employee, the data is more reliable and will have fewer errors. With the subdivision of duties businesses should also separate accounting function from custody of assets. What this means is that an employee who has access to or is in charge of an asset should not keep the accounting record for the asset. This guideline protects the assets from inefficient use, wasting or theft. Subdivision of duties also aids in the prevention of fraud. This way one employee’s work verifies the work of the other reducing opportunities for engaging in fraud are restricted. Organizations could also adopt measures like internal auditing, financial forecasts, serially numbering documents and training personnel so that they are competent to achieve internal control.

The business I chose for my report, FGI world, is a private counseling firm with offices around the world. To ensure control over cash payments and cash receipts in the business duties are divided among the employees. One employee receives the mail. He is responsible for opening and adding all the cheques. Another person has the job of adding them up again and depositing them in the bank. The two totals are matched everyday to ensure that there are no discrepancies. In this business all payments are by cheques and no credit cards or cash payments are processed. There are also different employees to invoice the customer and to apply the payments to the customers account.

In smaller businesses in which divisions of duties would be impractical three cash related internal control practices would be to have in place a good cash register system, a daily audit of cash transactions and an audit trail.




When it comes to ensuring that all money is received and recorded for every sale made for the purpose of recording revenue a monthly reconciliation of Bank account and accounts receivable and a monthly reconciliation of budgeted revenue and actual revenue are performed. Separate journals and subsidiary ledgers have been set up. By reconciling the accounts to one another, they are proving the equality of subsidiary ledgers to the controlling accounts. This process will help identify any errors.

Since FGI is a service business not a merchandising business they do not really have an inventory. However, management ensures that other assets such as office supplies are protected from waste and fraud by having an employee you distributes supplies and has a logging book where employees receiving the supplies have to sign off. This practice helps them monitor the use of the office supplies. To ensure that fixed assets are safe every fixed asset purchase is labeled or given a serial number. An inventory count is also done on a regular basis (twice a year).

Management ensures that all financial information is reliable by dividing duties. Each transaction is handled by several employees to ensure that data is accurate. An external auditor also conducts an audit every year.

A measure that could be taken to enhance the effectiveness of internal control in this company would be to introduce internal auditing. By having internal auditors who monitor the accounting controls, the efficiency and reliability of accounting information can improve. Another step they could take is to prepare a financial forecast. That is to organize a plan of operation to set goals for each division of the business. At the end of each month when actual results are compared with forecast amounts management can inspect changes from their intended results.



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