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Seven Principles of Internal Control Cheat Sheet (DRAFT) by [deleted]

Seven Principles of Internal Control

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Introd­uction

When creating an accounting system, businesses and nonprofit organi­zations must establish a framework for internal control. The internal control process helps to ensure that the system is working well and that all of the employees involved are performing as expected. Having such an essential business function provides reasonable assurance by decreasing the likelihood of mistakes and safegu­arding the organi­zat­ion's assets. Because of its signif­icance, companies do well to consider the fundam­ental principles of internal control.

1. Respon­sib­ilities

Companies must clearly establish respon­sib­ili­ties. Assigning specific respon­sib­ilities to indivi­duals ensures they understand what their part is in mainta­ining internal control. If an internal control respon­sib­ility is consis­tently overlo­oked, an effective internal control system will make it clear who is not performing an assigned task.

2. Record Keeping

Memory is not an infallible tool, especially when dealing with large amounts of inform­ation or transa­ctions. Having correct record­-ke­eping procedures will enable companies to have an accurate history of transa­ctions on hand. Such historical data allows for the company to refer to it later, if a problem is discovered or if clarif­ication is necessary.

3. Insurance and Bonding

Unfort­una­tely, even the best internal control system may not prevent the loss of an asset. By insuring assets and bonding employees, an organi­zation can rest assured that it will be reimbursed for the value of an asset if the asset is stolen, or otherwise misapp­rop­riated.

4. Asset Records and Custody

In an internal control system, the people who have physical access to cash and other assets are not the same people who keep the records relating to that asset. If, for example, the person respon­sible for keeping the petty cash records was the same person who had the key to the petty cash box, it would be easy for that person to help themselves to the cash while falsifying the petty cash record. The person who keeps asset records should not be able to physically access the assets he is tracking.
 

Principles of Internal Control

5. Respon­sib­ility for Related Transa­ctions

Sometimes, several tasks must be completed in order to complete a single transa­ction. In this instance, it is important that different employees each perform the separate tasks making up the transa­ction. This ensures that more than one person was involved in completing the task, increasing the odds that any mistakes or fraudulent acts are discov­ered.

6. Techno­logical Controls

Burglar alarms, electronic keypads and other techno­log­y-based security features can help organi­zations protect assets. Technology can often go where people cannot, and can be on the job 24 hours a day without requiring extra pay or breaks. Smart companies augment their internal control systems with approp­riate and cost-e­ffe­ctive techno­logy.

7. Indepe­ndent Review

Companies must review their internal control systems regularly. That should be done by an individual who did not perform any of the work being checked. An indepe­ndent evaluator can object­ively report on the work being done throughout the internal control process and has no reason to cover mistakes or be overly optimistic about the control proced­ures.