The Significance of Internal Control Accounting Systems
When comparing accounting providers, you may see “internal control” listed as a service and wonder what the significance of this deliverable is. The term internal control is used for accounting systems that can add tremendous benefit to your business.
How Internal Controls Improve Auditing Procedures, Financial Integrity and Operational Efficiency
There are numerous advantages of implementing proper internal control accounting systems. Beyond ensuring accurate accounting, internal controls can also assist with optimising business operations, improving your bottom line!
What Are Internal Controls?
Internal control, as defined by accounting and auditing, refers to the rules, procedures and measures set for how financial information is processed and stored. In layperson terms, controls are the “checks and balances” that keep your books honest.
Internal controls exist to ensure accuracy and prevent fraud in financial accounting.
They provide structure and uniformity, helping with better organisation and streamlining operations. More important yet, handling financial information in one prescribed manner makes it easier to spot irregularities, for prompt, proactive rectification.
Common Types of Internal Accounting Controls and Why We Need Them
Common types of internal accounting controls are listed below. Your business may already have some of these controls in place. There’s no limit to how many controls your organisation institutes, but what is important is that the controls are relevant to your business. There is little point in implementing a control that is impractical or unnecessarily onerous.
Separation of Duties
This is where it takes more than one person to complete a task to prevent theft or fraud. For example, having one person place inventory orders and another recording goods received. If human resources are limited, a business should at least split the responsibilities of bookkeeping, deposits, reporting and auditing.
As the name implies, this refers to restricting access of information and only granting authorisation to a few personnel for accountability proposes. Methods of access control include passwords, permissions, and two-factor authentication.
Reconciliation is the process of ensuring that two sets of records are in agreement. For example, comparing your bank statements to your income statement to see that the money in the bank matches what your records say that you received.
Conducting regular reconciliations enables faster identification of errors, theft or fraud.
Approvals or Authorisations
This internal control removes autonomous decision making to mitigate risks such as wasteful spend or extending credit to customers that are not creditworthy. Here, a manager has the designated responsibility of approving or authorising certain transactions. Criteria for authorisation can include large payments or unusual expenses.
Trial balances are usually prepared at the end of a reporting period, and they are used to detect any mathematical errors in the double-entry accounting system. A trial balance lists the nominal ledger accounts and their respective balances to ensure that all credits and debits balance. If these figures are not equal, the error must be found and rectified before the profit and loss statement is produced.
Data Timestamping and Back-ups
Time-stamping and back-ups are a must to protect against data loss, data tampering, and to maintain sound version control. These controls are often overlooked, but they are invaluable in instances where financial data is transferred or recorded across platforms—and thus vulnerable to loss of financial inputs.
Internal, physical audits are the most widely-used accounting controls, and they are necessary to verify current controls and the efficacy of each. It’s a check for your checks. This may sound over the top, but it is a sure-fire way to keep your business in tip-top shape.
- Identify inefficiencies in business processes
- Identify where internal controls are not being followed
- Verify the accuracy and integrity of your financial reports
- Glean valuable business insights for enhanced decision-making
- Prepare for external and SARS audits
The Relationship between External Audits and Internal Controls
Auditors assess whether or not the internal controls are working and controlling risks. If auditors’ findings are, to the contrary, they will report it and propose how these risks can be mitigated.
Auditors have to prepare financial statements confirming that organisations have obeyed all laws and conducted best practices governance which is legally binding.
How Can I Ensure That I Get The Most Out Of Internal Accounting Controls?
- Identify which controls are relevant and necessary to your business
- Create organisational policies that make adherence to your policies mandatory
- Wherever possible, use comprehensive, feature-rich, fully integrated software that automates your controls
Consider a managed accounting solution that includes identification, set-up and successful running of internal controls. Leverage decades’ worth of accounting and business-management expertise by speaking to one of our Exceed consultants.
Click here to contact us, https://www.exceed.co.za/audit-accounting-2/audit-accounting-contact/