Types of Internal Control Activities

Summary

This video explains six key types of internal control activities that businesses use to safeguard assets and ensure accurate financial reporting. Topics covered include Establishment of Responsibility, Segregation of Duties, Documentation Procedures, Physical Controls, Independent Internal Verification, and Human Resources Controls. The video provides relatable examples, such as cash register management and employee verification, to illustrate how these practices prevent fraud and ensure transparency. Whether you’re new to accounting or looking to reinforce internal control knowledge, this video offers valuable insights into the systems that protect companies from financial mishaps.

Takeaways

• 😀 Establishment of responsibility ensures accountability by assigning one person to manage specific tasks or assets.
• 😀 Segregation of duties divides responsibilities to prevent fraud by ensuring that no single individual has control over both record-keeping and physical custody of assets.
• 😀 Documentation procedures help maintain accurate records and evidence of transactions, facilitating audits and transparency.
• 😀 Physical controls protect assets by using security measures like safes, locks, and surveillance systems to safeguard company resources.
• 😀 Independent internal verification involves one employee reviewing another’s work to ensure accuracy and integrity, which helps catch discrepancies early.
• 😀 Human resources controls, such as bonding employees and conducting background checks, ensure that trustworthy personnel are handling sensitive tasks.
• 😀 Rotating employee duties prevents fraud opportunities by ensuring that no employee remains in one role long enough to exploit vulnerabilities.
• 😀 Requiring employees to take vacations can uncover fraudulent activities by forcing someone else to step in and perform the duties of the employee who is absent.
• 😀 Pre-numbering receipts, checks, and other documents helps track transactions and ensures that no documents go missing.
• 😀 Supervisors or independent auditors should verify the work of employees to provide an additional layer of oversight and reduce opportunities for fraud.

Q & A

What is the primary difference between establishment of responsibility and segregation of duties?

Establishment of responsibility involves assigning one individual to be accountable for a specific task, ensuring that only that person can perform the activity. Segregation of duties, on the other hand, involves dividing related tasks between different people to prevent fraud, such as separating the responsibilities for record-keeping and physical custody of assets.

Why is it important to establish responsibility for a specific task?

Establishing responsibility ensures that only one person is accountable for a task, making it easier to track and prevent errors or fraud. It clarifies who is responsible for specific actions, reducing the risk of passing blame onto others when something goes wrong.

How does segregation of duties help prevent fraud?

Segregation of duties prevents fraud by ensuring that no single person has control over both the record-keeping and physical custody of assets. This makes it much harder for an individual to steal or manipulate funds, as it would require collusion with another person.

Can you provide an example of segregation of duties in a company?

In a company, one person might be responsible for recording cash transactions in the accounting system, while a different person handles the physical cash deposits. This prevents any one person from manipulating both the records and the cash itself.

What role do documentation procedures play in internal control?

Documentation procedures help ensure that there is a clear record of every transaction, making it easier to verify the occurrence of transactions and track assets. This includes using pre-numbered documents and reconciling accounts, which helps detect any discrepancies or missing information.

What are some examples of physical controls that safeguard assets?

Physical controls include using safes for cash, locking warehouses to protect inventory, using security cameras for surveillance, and employing biometric access for sensitive areas. These measures physically protect assets and ensure that only authorized individuals can access them.

How does independent internal verification contribute to internal control?

Independent internal verification ensures that one employee’s work is reviewed by another, unbiased individual. This review can either be regular or surprise-based, providing an additional layer of oversight to catch errors or fraudulent activity.

What is the significance of bonding employees who handle cash?

Bonding employees is essentially taking out an insurance policy to protect the company against potential losses caused by employee theft. This adds an additional layer of security by financially protecting the organization if an employee misappropriates funds.

How does rotating employee duties help prevent fraud?

Rotating employee duties makes it harder for individuals to identify and exploit weaknesses in their roles. By regularly changing responsibilities, employees are less likely to find opportunities to commit fraud, as they don't stay in the same position long enough to learn its vulnerabilities.

What is the connection between requiring employees to take vacations and fraud prevention?

Requiring employees to take vacations can help uncover fraudulent activities because it forces the individual to let someone else perform their duties. If the employee has been engaging in fraudulent behavior, it may be exposed when another person takes over their tasks.