Why Is Internal Control Important

Improved Essays
Internal control is a procedure, or policy, put in place by management to stop fraudulent behavior, increase efficiency, promote accountability, and safeguard assets. In other words, an internal control is to prevent employees from stealing assets or committing fraud. In fact, there has been an increasing importance placed on internal controls in every level of an organization.
To my understanding, internal controls are a serial of control activities. They should include at least following specific control activities: adequate separation of duties, proper authorization of transactions or activities, adequate documents and records, physical control over assets and records independent checks on performance.
First of all, Separation of duties
…show more content…
Although the assistant did a wonderful job, she is pretty obviously using her duties as both cash handler and the person making accounting entries to embezzle money, because she can deal with vendors and customer and the associated accounts payable and accounts receivable, while entering all data into the accounting system, writing checks, and reconciling the company bank accounts and line of credit balances. Another example is that the repair technicians are free to order whatever parts they need to perform their repair …show more content…
The assistant has the necessary signatory to the bank account so that she could do the accounting, write the checks and sign the checks without notifying the owner. Once more, the repair technicians should not be able to freely make orders on whatever parts they need. This kind of activity needs authorization from specific department under control of department budget.
Founding 3 is the violation of adequate documents and records. Sometimes, the assistant has let vendors and key customers remove items from the retail store without paying for them with the comment that she would invoice them later. But she rarely wrote these items down or remembered to invoice them. Also, invoices from parts vendors are not reconciled to parts used by the repair department. Invoices from inventory vendors are not reconciled with sales and ending inventory.
Founding 4 is the violation of physical control over assets. In fact, the company has not physically counted inventory in the last three years. They rely strictly on the accounting records to calculate their ending inventory.
Founding 5 is the violation of separation principle of business expenditure from personal expenditure. Although owner owns the company and has right to draw on his line of credit at the bank to pay corporate bills, it does not mean that it is right to converge corporate bill with personal

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