Why is it important for businesses to have internal controls in place?
Internal controls provide protection against error and fraud as well as safeguard assets. In addition, with a good internal control system in place, businesses can effectively communicate expectations to employees which in turn improves overall performance, efficiency, and accountability.
What are some basic internal controls businesses can put in place to ensure they are protected?
- Segregation of duties: Ensure more than one person is needed to complete a task. Where there are multiple responsibilities with a key process, the components of that process should be delegated to more than one individual. Examples of areas where there should be segregation of duties include:
- Bank reconciliation, collecting and depositing cash
- Preparing payments and authorizing payments
- Vendor set-up and approval of purchase orders
- Regular reconciliations: Bank accounts should be reconciled regularly, but other accounts should be monitored as well and any variances from expectations investigated.
- Access controls: Passwords should be used for all computer workstations and software applications. Additionally, any physical equipment should be stored in a secured locked space with a sign-out procedure in place to track access.
- Approval requirements: Limits on purchasing power are recommended, as well as requiring two signatures on any cheques being issued.
Employing these basic internal controls will help businesses identify irregularities, run more efficiently, and possibly detect fraudulent activity.
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