Generic Internal Controls

• A transaction requires authorization, record keeping, and custody of assets, which should be separated among different employees.
• Segregation of duties refers to the division of responsibilities within an organization to ensure that no one person has complete control over critical processes.
• Examples of segregation of duties include having separate individuals responsible for initiating transactions, recording them, approving them, and reconciling them.
• The separation of duties is important to prevent fraud or errors from occurring.
• It ensures that no single person controls all key stages of a transaction.
• This prevents misuse of assets and fraud caused by any single employee.
• Integrity and ethical values are essential components of an effective control environment.
• Controls can be classified as generic (applicable across all organizations) or specific (tailored to address unique circumstances).
• Custody of assets includes safeguarding physical assets such as cash, inventory, equipment, and securities.
• Internal controls are designed to mitigate risks associated with financial reporting and operations.
• Generic internal controls refer to general principles and practices that apply to most businesses regardless of their size or industry.
• This helps prevent fraudulent activities such as embezzlement, theft, or misappropriation of funds.
• Separation of duties also helps detect errors and irregularities early on.
• Separation of duties also reduces the risk of errors by ensuring that multiple people are involved in completing tasks.
• For example, in accounts payable, there may be someone who receives invoices, another who records payments, and a third who reconciles bank statements.
• For example, if two people are involved in processing a purchase invoice, it reduces the risk of both parties colluding to commit fraud.
• Specific internal controls are tailored to meet the needs of individual companies based on factors such as size, complexity, risk profile, regulatory requirements, and business objectives.
• Separation of Duties:

  • Separate employees (from those receiving cash) handle the money at the end of the day when cashing in (counting, recording and banking money)
  • Ensures no profit is being stolen and avoids theft
• Authorisation:

  • Payments should be approved at a board meeting with two signatures required on all cheques
  • Shop assistants shouldn't be responsible for inventory transactions
  • Being approved by a manager prevents employees from writing checks or ordering stock for themselves, protecting the employer's inventory or cash assets
• Adequate Documentation:

  • Use multi-copy, consecutively pre-numbered source documents for each transaction (order forms, receipts, petty cash vouchers)
  • Allows a copy to be retained/tracked at the point of origin and for other copies to be given to various departments/people who require the information
  • Prevents loss of documents and duplicate numbering by employees
  • Enables checking of documentation against physical money or inventory
  • Records of each transaction in various departments for double-checking and reconciliation
• Verification:

  • Provides proof of information in financial statements through source documents
  • Allows an auditor to check the accuracy of records
  • Ensures consistency in results when different people check the information
  • Enables checking of documentation against physical money or inventory
  • Records of each transaction in various departments for double-checking and reconciliation
  • Verification complements adequate documentation
• Rotation of Duties:

  • System where employees do different jobs at different times
  • Can require employees to take holidays or have someone fill their position in their absence
  • Helps identify odd procedures and anomalies in systems
  • Some businesses change jobs on a monthly basis to identify issues
  • Job rotation helps in system improvement
• Physical controls in a business include: locks, security cameras, and inventory insurance
• Locks are used to secure physical access to buildings or rooms
• Security cameras are used to monitor and record activities in specific areas
• Inventory insurance provides coverage for loss or damage to a company's inventory
• Internal controls can protect money and other assets
• Internal controls ensure no profit loss
• Lack of good internal control components can lead to employees stealing hundreds of thousands of dollars from their employers