The American Institute of Certified Public Accountants (AICPA) states that segregation of duties “is based on shared responsibilities of a key process that disperses the critical functions of that process to more than one person or department. 4 He was sentenced to 13 years in prison on 33 felony counts.Ĭurrier was able to circumvent one of the most important internal controls: segregation of duties. He used the identities of at least nine real people as well as eight fictitious people and stole about $6.2 million. In his bank job, he allegedly opened 61 fraudulent loans. The retired mayor of Enid, Oklahoma, Ernst Currier, had a job as a loan officer and then as a senior vice president at Security National Bank. Not only would internal controls prevent outside access to the data, but proper internal controls would protect the data from corruption, damage, or misuse. With proper internal controls functioning as intended, there would have been protective measures to ensure that no unauthorized parties had access to the data. Consider the 2017 massive data breach at Equifax that compromised data of over 143 million people. An effective internal control system allows a business to monitor its employees, but it also helps a company protect sensitive customer data. It should be clear how important internal control is to all businesses, regardless of size. As we discuss the internal controls, we see that the internal controls are used both in accounting, to provide information for management to properly evaluate the operations of the company, and in business operations, to reduce fraud. This is just one type of internal control. The cost of the popcorn, soda, and ice will be recorded in the accounting system as an inventory item, but the internal control is the comparison of the recorded sales to the number of containers used. Providing a courtesy cup ensures that customers drinking free water do not use the soda cups that would require a corresponding sale to appear in the point-of-sale system. The same process accounts for popcorn buckets and other containers. A point-of-sale system compares the number of soda cups used in a shift to the number of sales recorded in the system to ensure that those numbers match. A movie theater does not use a system to directly account for the sale of popcorn, soda, or ice used. This internal control, the small plastic cup for nonpaying customers, helps align the accounting system and the theater’s operations. If you were to go to the concession stand and ask for a cup of water, typically, the employee would give you a clear, small plastic cup called a courtesy cup. Internal controls allow the owners to ensure that their employees do not give away the profits by giving away sodas and popcorn. The prices of the items sold at the concession stand are typically high, even though the costs of popcorn and soda are low. Internal controls are more than just reviews of how items are recorded in the company’s accounting records they also include comparing the accounting records to the actual operations of the company.įor example, a movie theater earns most of its profits from the sale of popcorn and soda at the concession stand. Proper accounting records are used to create the financial statements that the owners use to evaluate the operations of a company, including all company and employee activities. Internal control keeps the assets of a company safe and keeps the company from violating any laws, while fairly recording the financial activity of the company in the accounting records. See the Institute of Internal Auditors website to learn more about many of the professional functions of the internal auditor. Part of an accountant’s function is to understand and assist in maintaining the internal control in the organization. ensure that employees are in compliance with corporate policiesĪ properly designed and functioning internal control system will not eliminate the risk of loss, but it will reduce the risk.ĭifferent organizations face different types of risk, but when internal control systems are lacking, the opportunity arises for fraud, misuse of the organization’s assets, and employee or workplace corruption.monitor operations of the organization to ensure maximum efficiency.ensure that the accounting system is functioning properly.The internal control system consists of the formal policies and procedures that do the following: Here we address some of the practical aspects of internal control systems. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license) Figure 8.3 The Internal Control Environment.
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