Other reasons for internal control

Table of Contents:
Statutory (non-financial)

Although there may be no laws requiring financial controls, the business may carry out activities for which there is a statutory duty to report transactions (and not only necessary in currency units). As examples: the financial services industry must have adequate details of customers, particularly regarding compliance with money laundering laws; airlines must record the names and numbers of passengers. These examples demonstrate that the need for internal controls is wider than purely financial control.

To maintain efficient operation/safeguard assets

Internal controls can assist with ensuring that business processes run efficiently and effectively by ensuring prompt and accurate reports of activity, which may then be acted upon.

The known existence of internal controls often has a deterrent effect. We are but human and the temptation to commit fraud lurks within many of us. The motives to commit fraud are many. A sound, visible system of internal controls is a support to executives and staff generally; blaming a fraudster is easy, but it may be that the lack of proper controls was a contributor to the sad event.

Set out below is an outline of overall objectives and typical sub-objectives of what has to be controlled which might be found in a project revenue system.

Billing (revenue) cycle

Objective: To ensure that all project income earned is invoiced, properly recorded as a receivable and is ultimately collected as cash:

1 Completeness of orders. Objective: To ensure that all work done has been ordered (under contract) and that all orders are controlled for completeness:

1.1 All work is proper to the company's business and is controlled from the start.

1.2 No work can go unbilled.

2 Completeness and timeliness of invoicing. Objective: To ensure that all work done is invoiced on time/at the earliest time:

2.1 Projects are billed, and billed on time.

2.2 All invoices are accounted for and details checked for accuracy.

2.3 Back-up control over completeness/timelines of invoicing.

2.4 Control over timeliness of and also completeness of invoicing.

3 Accuracy of accounting records. Objective: To ensure the completeness, accuracy and validity of entries in the debtors/ receivables general ledgers:

3.1 Receivables ledger entries will be as accurate as the invoice details.

3.2 Check on completeness and accuracy of invoicing.

4 Security of the receivables balances and custody/recording of cash received. Objective: To ensure that receivables are recoverable and cash received is properly recorded and kept securely:

4.1 Credit worthiness control - therefore control over asset value.

4.2 Segregation of duties - cash is kept secure.

4.3 Control over security of asset - the debtor. A control over the accuracy of both the posting of invoices and cash receipts.

Reviewing internal controls

Along with knowledge of the company's reports and accounts and in particular its detailed accounting policies, it is surprising that more executives and directors are not aware of, or have at least an overview of, their company's internal control system and procedures. The fact that in the United Kingdom and particularly for US-listed companies executives have to confirm that they are satisfied with their accounts' figures may encourage your interest!

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