Internal Controls Are \"Methods Put in Place

Internal controls are "methods put in place by a company to ensure the integrity of financial and accounting information," and to protect the organization's assets from misappropriation by internal sources (Investopedia, 2013).

Internal controls help to prevent fraud, but they also allow the company to have reliable data on all transactions, which can be used for any number of control purposes. Further, internal controls promote operational efficiency and they encourage adherence to management policies regarding the handling and recording of cash and transactions (No author, 2013).

There are a number of internal controls that can be put into place for the handling of cash. These include the segregation of duties, recording the receipt of cash, having cash handled only be authorized persons, having a copy of any cash receipts sent to the accounting department, verification of the amount received and reconciliation.

Segregation of duties means that the company should implement a system whereby no one individual has full control over the cash. For example, where one person might receive cash, another person might disburse it. When multiple people have a responsibility for managing an organization's cash, it is much more difficult for any individual to take any of that cash. Another key control is to have management oversight of cash handling functions. Cash received, for example, can be verified by a person in management. This ensures that the cash received is the same as the cash on hand. Likewise, it is wise for the company to require double signatures on cash that is being disbursed, so that a second party always is aware when cash is being moved out of the organization. This way, no one individual can issue cash without management being aware.

It is also advised that the company institute a system of receipts for cash movements. For example, all cash that is received should come with a receipt. This protects both the person depositing the cash and the person receiving it. For the company, the receipt provides a written record of what cash should be in the system. With the receipt system, a copy of the receipt should be forwarded to the accounting department, to management or to both. This system means that a third party will always have a record of the cash that the organization has taken in. Further, the receipts for cash coming in and going out can later be reconciled with the actual cash holdings. For many businesses, this process takes place daily. The clerk, accounting department, or both might match the cash on hand with the receipts for the day. Thus, if the company takes in $1,000 and disburses $120, the cash on hand should be $880 plus the opening balance. If it is not, then there is either a missing record or missing cash. Often, the discrepancy is something that can be traced to the paper records, so the reconciliation process is also valuable for its ability to improve record-keeping throughout the organization.

It is also important that all cash handling be done only be authorized individuals. Where individuals handle cash, that activity should be specifically approved by management. This ensures that some sort of vetting process can be undertaken for people who are to handle cash, so that the organization only allows its most-trusted people to handle cash. This adds an extra layer of prevention to the internal controls regarding cash handling.

There should also be internal controls with respect to accounts receivable. Some of the internal controls for accounts receivable include segregation of duties, authorized access, receipt of payments, wire transfers, depositing of checks, recording payments, printing receipts and bank account maintenance. As with cash handling, segregation of duties is important so that one person is not wholly responsible for the handling of accounts receivable. If there are multiple people involved in the process, it is more difficult for any fraud or wrongdoing to occur because those people would have to work together on the act. Also like with cash handling, it is important that accounts receivable should only be handled by those who have been expressly authorized to do so.

When payments are received, there should be receipt issued. This receipt will then be used to help the reconciliation process later on, but it will also provide both management and the accounting department a record of the transaction. If payment is done by wire transfer, there should be a scan made of any check and of the payment receipt itself. The payment should then be recorded when the funds have been received, and this record should be reconciled against the wire transfer confirmation. The accounting department needs to be sent copies of all receipts for payment, so that these can be recorded into the company's ledgers. The transactions should be entered according to the balancing system so that the sale, the accounts receivable and the cash are entered as two transactions that ultimately balance out.