Preventing operating losses, fines, litigation, errors and unnecessary risk exposure.
Internal Controls Definition
Broadly defined, internal controls are those functions within accounting and auditing that involve all of the rules, procedures and systems implemented by a company to assure operational effectiveness, reliability of financial information, compliance with laws, regulations and policies, and the protection of resources, including both physical assets and intellectual property.
There are a number of definitions of internal controls but they fall into these categories:
Application of Internal Controls
Authorization & Approvals
Do people making decisions have the proper authorization to do so? For instance, for purchases exceeding a set amount — $5,000 — must a Controller or CFO or Treasurer review and authorize such a purchase. The company may instruct their purchasers or banks not to honor any such purchase if a check does not bear their signature.
Check Co-Signers
A control for a business may be that checks should be co-signed by authorized officials for anything exceeding a set amount.
Bank Reconciliations
Bank reconciliations compare bank statements to general ledger entries. The purpose is to reconcile and correct any errors, unforeseen fees or fraudulent entries.
Employee Reimbursements
Employee expenditures, travel, entertainment and credit care policies are a form of control. For example, all travel may need to be pre-approved by a supervisor
Why are internal controls important?
Types of Internal Controls
This involves the scope, design, adequacy and effectiveness of internal control over financial reporting and the company’s disclosure controls and procedures.
Items evaluated include the accuracy, timeliness and thoroughness of the company’s financial information, including accounting records and transactions.
Some applications would include monthly close procedures, co-signing checks and bank reconciliations.
Other examples might include how the company ensures its payments to third parties for services rendered are valid.
Reports may be created to test the design of controls and the operating effectiveness of controls.
Items reviewed under the risk umbrella can include information security, competition, and regulation.
Tests may be conducted related to a Company’s investments, cash management and foreign exchange management, and the adequacy of the Company’s information security policies. For example, what are the steps taken by management to monitor and mitigate these exposures and to identify future risks?
Trust Services Principles
For certain services that deal with confidential information or services agreements in health care or software, for example, there are the so-called “trust services principles.”
These include security, confidentiality, availability, process integrity and privacy. Here’s a quick summation of each.
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