What Are Internal Controls

What Are Internal Controls?
Internal controls are the mechanisms, rules, and procedures implemented by a

company to ensure the integrity of financial and accounting information, promote
accountability, and prevent fraud. Besides complying with laws and regulations
and preventing employees from stealing assets or committing fraud, internal
controls can help improve operational efficiency by improving the accuracy and
timeliness of financial reporting.
Internal control, as defined in accounting and auditing, is a process for assuring achievement
of an organization's objectives in operational effectiveness and efficiency, reliable financial
reporting, and compliance with laws, regulations and policies.
What are the 3 Types of Internal Controls?

 There are three main types of internal controls: detective, preventative, and
corrective. ...
 All organizations are subject to threats occurring that unfavorably impact the
organization and affect asset loss. ...
 Unfortunately, processes and control activities are not perfect, and mistakes and
problems will be found.
Business leaders understand it is essential to have accurate financial data to drive operations and measure
However, without the proper controls in place errors, fraud, and other issues can occur, hindering operati
and growth. While some small business owners assume internal control systems are only designed for lar
organizations, these functions are crucial for companies of all sizes in all industries.
Internal control accounting systems are the policies and procedures used to ensure accuracy
and reliability across accounting reports to:
 Prevent fraud
 Control risk
 Proactively identify financial issues
 Protect resources (both tangible and intangible) from theft and waste
 Operate efficiently
 Generate timely, reliable reporting
 Measure progress towards business objectives and goals
 Comply with applicable laws and regulations
 Secure outside funding
 Reassure investors
Controls can either be preventative, deterring fraud and mistakes, or detective, identifying
issues after they have happened. Working in unison they can remedy existing problems and
help to avoid future ones to strengthen ongoing business activities.
The most common types of internal accounting controls include:
1. Separation of Duties
Assigning specific duties to each employee that divides accounting responsibilities is

a basic control system to ensure that the people responsible for financial reporting
are separate from the people tasked with making cash deposits and asset purchases.
Similarly, anyone conducting audits should be as far removed from financial duties
as possible to ensure impartiality. The further apart these functions are in an
organization, the lower the risk for fraud associated with each.
In small companies where there are not enough employees to separate duties
completely, peer review can serve a similar “checks and balances” function to
mitigate risk. While complacence and collusion can still result in erroneous
reporting, requiring peer sign-off on reports and job functions can eliminate simple
opportunistic theft.
Because fraud can occur at any level of an organization separation of duties is crucial
at not just the top, among executive leadership, but at every step of the
organizational hierarchy. In large organizations, rotating assignments among
employees with the same job functions helps to isolate discrepancies and conduct
thorough analyses of root causes.
2. Access Controls
Access controls keep people out to keep value in the organization.
Setting permission levels to safeguard data and physical assets is one of the most
routine controls businesses use because they are so easy to implement. In password-
protected areas, secure passwords and two-step authentication procedures make it
difficult for employees to use others’ login credentials. Additionally, changing
passwords frequently enables access controls to remain steadfast over time.
Access logs and usage history reports are automated features that can be used to
regularly audit software systems to find discrepancies. They can also serve as
evidence in identifying culprits when errors occur, or fraud is present.
Access controls can also be physical in nature allowing for more effective
management of tangible assets, such as restricting badge access to employees who
should not be allowed in certain areas. Other types of physical access controls
include safes for cash or other valuables.
3. Required Approvals
Designating managers to be responsible for transaction authorizations is an internal

control function that funnels purchase decisions through the most trusted employees.
Authorizations may be required for large payments, unusual expenses, and
unexpected cost increases.
In larger organizations required approvals may follow a hierarchy, necessitating

multiple layers of agreement before being finalized. The aim with this approach is to
weed out unnecessary expenses at every level to minimize waste and reduce
incidence of fraud.
4. Asset Audits
Auditing is the most widely used internal accounting control.
Financial audits like cash reconciliations are performed regularly to verify that actual
balances match accounting balances. Differences can be analyzed and investigated,
where necessary, to result in accurate financial reports.
However, asset audits are not simply electronic in nature – they also include physical
audits. Any time a cash drawer is tallied, or raw material counts are verified, an asset
audit is being performed. These on-site audits should be performed regularly to
ensure financial accuracy. Counting cash should be done hourly or daily, while
physical asset tracking is typically done quarterly or annually. Manually counting
assets in this manner is crucial because fraud can occur off the books to bypass
financial report audits.
In addition to these routine checks, detective asset audits should be performed as

well. Utilizing surprise or random cash counts, for instance, helps to keep employees
honest and focused on performing work fastidiously.
5. Templates
Standardizing financial documents creates consistency, which makes it easier during

the auditing process. While some reports like a balance sheet or P&L statement have
a standard format, other documents can vary substantially between business teams.
Creating and using the same templates for estimates, invoices, purchase orders,
funding requests, receipts, and expense reports creates comparability across like
items during an audit. Streamlining these items is an important internal accounting
control that businesses tend to overlook in the rush to implement more obvious
control systems.
6. Trial Balances
Double-entry accounting ensures that the books are always balanced. However,
errors and fraud can still exist in a double-entry accounting system, which is why
trial balances should be used in conjunction with this method. Trial balances are a
form of accounting control that infuse additional reliability into the system by
keeping an internal record of credits and debits to allow businesses to identify issues
early on.
7. Reconciliations
Bank, supplier statement, and credit card reconciliations can factor into other
accounting control systems, however conducting these reconciliations is an internal
control in and of itself as well. Understanding which items have cleared, are in -
transit, or have not yet posted allows businesses to uncover errors and fraud.
Furthermore, performing regular reconciliations informs strategic business decisions
and day-to-day operations.
8. Data Backups
Data backups are the most forgotten internal accounting control system. Because
accurate financial data requires technological interaction between platforms, loss of
financial inputs can skew reporting and muddle audits. When technology fails, past
reports and vital data can go missing, delaying reporting and impairing essential
accounting functions.
Backing up computer files to the cloud safeguards data from loss when computers
become corrupted or servers fail.
Implementing the proper accounting controls is meaningless unless employees are

equipped to act when they notice a problem or detect suspicious activity. Formal
policies must be created to educate employees on how to respond when issues arise.
All employees should know who they can tell when there is suspicion of error or
malicious intent and what kind of response to expect. Furthermore, their anonymity
needs to be protected after doing so.

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What Are Internal Controls?

Internal controls are the mechanisms, rules, and procedures implemented by a

What are the 3 Types of Internal Controls?

The most common types of internal accounting controls include:

Assigning specific duties to each employee that divides accounting responsibilities is

Access controls keep people out to keep value in the organization.

Designating managers to be responsible for transaction authorizations is an internal

In larger organizations required approvals may follow a hierarchy, necessitating

Auditing is the most widely used internal accounting control.

In addition to these routine checks, detective asset audits should be performed as

Standardizing financial documents creates consistency, which makes it easier during

Implementing the proper accounting controls is meaningless unless employees are

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