Accounting: Internal Control

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To eliminate fraud and accurately record transactions, businesses use a set of strategies collectively known as internal controls. These organizational policies that protect assets and promote rule-following by employees.


The close examination of a company's accounting procedures and financial records is called an audit. Many public companies employ an internal auditor to ensure that internal control policies are being followed. An external auditor determines whether a public company is presenting its financial statements in accordance with generally accepted accounting principles. The controller is the top accounting officer in a business. In most large businesses, the treasurer is responsible for signing checks.


There are a few key organizations and laws that maintain internal control standards. The Committee of Sponsoring Organizations (COSO) issues guidelines for internal control and fraud detection. The Sarbanes-Oxley Act makes businesses responsible for the accuracy and completeness of their financial records. According to Sarbanes-Oxley, an external auditor must evaluate the internal controls of public companies. The Public Company Accounting Oversight Board (PCAOB) judges the external auditors of public companies. Under Sarbanes-Oxley, an accounting firm may not provide comprehensive consulting services for the public companies it audits.


A business with effective internal controls will separate the accounting and sales departments. This helps to prevent fraud. The accounting and marketing duties do not need to be separated in an effective internal control system. Businesses typically pre-number documents like invoices and sales orders to prevent any from being misplaced.


Effective internal controls are important, but it is generally not worthwhile for a business to achieve perfect internal controls. A business would settle for less than optimal internal controls because achieving perfect internal controls may be too expensive.