Internal_Controls

Assignment: Internal Controls Robin Toups XACC/280 July 25, 2010 Kimneye Cox Internal controls are an integral part of a business operation because of the extreme importance of assets. According to the InvestorWords (2010) website assets are defined, “Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.”Assets can be defined as business resources that are owned to generate potential services and benefits. Operational goals of profitability are achieved through a company’s assets. In other words, these are the resources that allow organizations to provide goods and services to generate profits. Assets can be current assets such as cash, accounts receivables, inventory, and prepaid expenses that generate benefits within the current accounting period. They also can be long-term items such as property or equipment.    Since assets are an organization’s most valuable resources, they need to be protected against theft and unauthorized use through creating and implementing a company internal controls system. Internal controls are actions and procedures by which a company conducts internal monitoring. Through self-monitoring, a company can increase the chances that certain goals will be met and ensure efficiency of operations and legal compliance. Internal controls form an integral part of any business. Simply, it is a system of internal controls serving to minimize errors in the accounting records and to deter fraud, embezzlement and theft by employees, customers and vendors; not to mention internal controls are required by law.   The Sarbanes-Oxley Act (SOX) of 2002 was a law that was passed after numerous corporate scandals. According to Sarbanes-Oxley Act 2002 (2006), “The Sarbanes-Oxley Act of 2002 is mandatory. ALL organizations, large and small, MUST comply.” The SOX Act requires companies to be more attentive to internal controls. Corporate executives are responsible for ensuring the effectiveness and the reliability of established internal controls over such things as financial reporting. In addition to internal entities, external auditors are required to confirm that control levels are sufficient. The consensus is that SOX helps protect companies and their stockholders. Although complying with SOX is time-consuming and costly, the majority of companies believe that the Act is working well. The principles of internal control are: establishment of responsibility; segregation of duties; documentation procedures; physical, mechanical, and electronic controls; independent internal verification; and other controls such as bonding and requiring employees to take vacations. In comparing these principles of internal control some of the advantages and disadvantages that exist can be defined. An essential principle of internal controls is establishing responsibility. This control is most effective when only one person is responsible for a given task. Authorization and approval of transactions are included in establishing responsibilities. Segregation of duties is another essential part of internal controls. Two common applications of this principle exist. First, different individuals should be responsible for related activities. Second, record keeping methods for all assets asset should be separate from physical custody. In essence, allowing one individual to be responsible for an entire activity increases the potential for errors and can create a single point failure. Additionally, all companies should have established procedures for documents. Documents provide evidence that transactions and events have occurred. This control contributes to the accuracy and reliability of accounting records. Controls over physical, mechanical, and electronic components are important as well. These measures relate to safeguarding assets as well as relate to the enhancing the accuracy and reliability of the accounting records. However, both cases present measures that decrease the reliance on the human element, which is one of the limitations of internal controls. The internal verification control involves the review of data prepared by employees. This control is especially useful in comparing recorded accountability with existing assets. Internal auditors are often assigned the duty of internal verification. These auditors will perform reviews of individuals and departmental activities to ensure that internal controls are being followed. Recommendations for improvements are given when necessary. Oftentimes this is the time that fraud is discovered. Therefore, this control can potentially prevent a financial loss within a company. A few miscellaneous controls are worthy of mentioning; bonding, rotation of duties and ensuring time off is taken, and conducting thorough background investigations. These controls are small yet effective measures that a company can do to help ensure their success. Bonding employees who handle cash will simply help safeguard company assets. Rotating employees and forcing time off will deter prevent thefts by not allowing any employee to stay in one position for an extended period of time and conceal improper actions. Last, background checks are considered one of the easiest and most inexpensive tools for a company to guard themselves against fraud and theft. Internal controls are not without limitations. Many variables can affect the internal controls of a company. The majority of companies design their own control systems. In doing so, they need to consider the reasonableness of the control. If the control has greater negative effects than benefits then it is not worth implementing. In fact, many corporations face the reality that many of the internal controls are too costly to implement. Larger corporations would have greater financial means than a small company when considering what internal controls to implement. Another item that needs to be considered is that these controls are maintained and managed by human beings. Human beings are capable of making errors. Many factors can be blamed on human error; fatigue, carelessness, or plain indifference. Therefore, careful consideration needs to be given regarding employees who are placed in such positions. In conclusion, internal controls are necessities to safeguard a company’s and shareholder’s assets. Internal controls also ensure that companies follow certain principles to provide accurate and reliable accounting records. Therefore, the implementation of internal controls allows companies to have confidence in the fact that they are taking every precaution against potential internal theft and fraud.  References Investor Words. (2010). Asset. Retrieved from http://www.investorwords.com/273/asset.html Sarbanes-Oxley Act 2002. (2006). A Guide To The Sarbanes-Oxley Act. Retrieved from http://www.soxlaw.com/