INTERNAL CONTROL

PROCEDURES IN ACCOUNTING

| 2023-24 LCBA
 INTERNAL CONTROLS
Internal controls are policies and procedures put in place to ensure
the continued reliability of accounting systems. Accuracy and
reliability are paramount in the accounting world. Without
accurate accounting records, managers cannot make fully
informed financial decisions, and financial reports can contain
errors. Internal control procedures in accounting can be broken
into seven categories, each designed to prevent fraud and identify
errors before they become problems.
 1. Separation of Duties
-involves splitting responsibility for bookkeeping, deposits,
reporting and auditing.

Purpose:
to minimize the occurrence of errors or fraud by ensuring
that no employee has the ability to both perpetrate and
conceal errors or fraud in the normal course of their duties.
 Separation of Duties
Cash – Manage this separately from the other accounts below to prevent misuse or having
unbalanced accounts. Consider using cash alternatives like checks, credit and debit cards, online
banking, etc. Your bank provides a detailed statement of account for these cash equivalents that
will help you detect unusual activity.

Accounts Receivable – A dishonest employee can accept payment and fail to deposit it in the
company’s account. To apply segregation of duties, have one person manage sales made on credit
by issuing credit memos. Meanwhile, get another person to receive the payment once it’s made.

Inventory – One employee orders from suppliers, while another logs the goods in your system.
This way, both can countercheck the number of items ordered versus the actual physical
inventory.
Example:
The person who approves the purchase of
goods or services should not be the person
who reconciles the monthly financial reports.
The person who approves the purchase of
goods or services should not be able to obtain
custody of checks.
2. Accounting System Access Controls
Controlling access to different parts of an accounting system via
passwords, lockouts and electronic access logs can keep
unauthorized users out of the system while providing a way to
audit the usage of the system to identify the source of errors or
discrepancies.

Think of it this way: if everyone can edit and approve your financial
activity, errors are more likely to happen. If fraud takes place, it will
also be more difficult to identify the culprit since a lot of people
had prior access.
 Accounting System Access Controls
To apply this control measure, first, limit the access to your
accounting system. This means only the relevant team should be
able to access it. Then, set access levels as suggested below:

Creator – Creates financial reports and submits it for initial

approval
Editor – Edits financial reports (if necessary) and forwards it for
final checking
Approver – Checks reports and prevents further editing alongside
final approval
 3. Physical Audits of Assets
Physical audits include hand-counting cash and any physical assets
tracked in the accounting system, such as inventory, materials and
tools. Physical counting can reveal well-hidden discrepancies in
account balances by bypassing electronic records altogether.
Counting cash in sales outlets can be done daily or even several
times per day. Larger projects, such as hand counting inventory,
should be performed less frequently, perhaps on an annual or
quarterly basis.
 Physical Audits of Assets
A good standard for the frequency of such audits is the movement
of these assets. When managing cars in a dealership, counting
once a month will do. Cars are huge items; it’s not too hard to
monitor them subconsciously on the day-to-day. On the other
hand, when you’re counting cash, at least once a day is best. After
all, when there’s a lot of cash movement (think supermarkets),
there’s also a greater opportunity for mistakes or worse, theft.
4. Standardized Financial Documentation
Standardizing documents used for financial transactions, such as
invoices, internal materials requests, inventory receipts and travel
expense reports, can help to maintain consistency in record
keeping over time. Using standard document formats can make it
easier to review past records when searching for the source of a
discrepancy in the system. A lack of standardization can cause
items to be overlooked or misinterpreted in such a review.
 5. Daily or Weekly Trial Balances
Using a double-entry accounting system adds reliability by
ensuring that the books are always balanced. Even so, it is still
possible for errors to bring a double-entry system out of balance at
any given time. Calculating daily or weekly trial balances can
provide regular insight into the state of the system, allowing you to
discover and investigate discrepancies as early as possible.
6. Periodic Reconciliations in Accounting Systems
Occasional accounting reconciliations can ensure that balances in
your accounting system match up with balances in accounts held
by other entities, including banks, suppliers and credit customers.
For example, a bank reconciliation involves comparing cash
balances and records of deposits and receipts between your
accounting system and bank statements. Differences between
these types of complementary accounts can reveal errors or
discrepancies in your own accounts, or the errors may originate
with the other entities.
 7. Approval Authority Requirements
Requiring specific managers to authorize certain types of
transactions can add a layer of responsibility to accounting records
by proving that transactions have been seen, analyzed and
approved by appropriate authorities. Requiring approval for large
payments and expenses can prevent unscrupulous employees
from making large fraudulent transactions with company funds, for
example.
THANK YOU
Presentation by Rey Greña Jr.

LCBA