What are Internal Controls

Summary

In this video, Alex from Appos Academy introduces internal controls for nonprofits, emphasizing their importance in protecting assets and individuals against fraud. He illustrates how a chain of internal controls works, using the example of a fundraiser, and explains the necessity of each link for the system's integrity. Alex also highlights the role of internal controls in safeguarding the reputation and integrity of those involved in financial processes, promising a future course on the topic.

Takeaways

• 🛡️ Internal controls are processes put in place to protect a nonprofit's assets and the people involved, with the main purpose of preventing fraud.
• 🔗 Internal controls function like a chain, where each link represents a safeguard; if one link is broken, the entire system is compromised.
• 💼 A complete internal control system provides peace of mind that the organization's assets and personnel are secure against fraudulent activities.
• 📋 The example of a fundraiser illustrates how internal controls can track the flow of donations from collection to accounting records, ensuring transparency and accuracy.
• ❓ Key questions to ask when setting up internal controls include the amount donated, who counted the money, if the deposit matches the count, and the accuracy of accounting entries.
• 👤 Each answer to these questions represents a control point that must be established to maintain the integrity of the system.
• 👥 Separation of duties is crucial in internal controls; for instance, different people should count the money, deposit it, and record the transactions to prevent fraud.
• 🚫 Without proper controls, there's no way to detect if someone in the process takes money, compromising both the assets and the reputation of the organization.
• 📊 Internal controls protect individuals by ensuring that they are not wrongly accused of misdeeds if they do not have access to certain actions, like withdrawing money from the bank.
• 🔍 A solid internal control system can exonerate individuals from blame if a mistake is made, as it provides a clear record of who had access to what actions.
• 🎥 The speaker, Alex from Appos Academy, promises a future course on internal controls, indicating the importance of this topic for nonprofits.

Q & A

What is the main purpose of internal controls in a nonprofit organization?

The main purpose of internal controls is to protect the organization's assets and the people involved against fraud.

How does the analogy of a chain describe the concept of internal controls?

The analogy of a chain describes internal controls as a series of interconnected links that, when intact, provide strength. If one link breaks, the entire chain is compromised, similar to how a failure in one control can undermine the whole system.

What is an example of an internal control process in a nonprofit's fundraiser?

An example is the process where money is collected in a donation bucket at a fundraiser, counted, deposited into the bank, and recorded in the accounting system to verify the fundraiser's profitability.

What are the key questions to ask when setting up internal controls for a fundraiser?

The key questions include how much money was donated, who counted the money, whether the deposit amount matches the counted amount, and how to ensure the accounting record was entered correctly.

Why is it important to have more than one person involved in the counting and depositing of funds?

Having more than one person involved ensures accountability and reduces the risk of fraud, as each person can verify the actions of the other.

What happens if a person who counted the money takes some without proper internal controls?

Without proper internal controls, there would be no way of knowing if money was taken, compromising the organization's assets and the integrity of the person counting the money.

Why is it necessary to protect people within a nonprofit organization through internal controls?

Internal controls protect people by ensuring that they are not wrongly accused of fraud or mistakes when they have no access to perform the actions in question.

Can you provide an example of how internal controls can protect an individual from false accusations?

If a person, like Dennis, who deposits money into the bank does not have access to withdraw money, he cannot be blamed for any missing funds, thus protecting him from false accusations.

What is the role of internal controls in ensuring the integrity of the accounting system?

Internal controls ensure the integrity of the accounting system by verifying that all transactions are recorded accurately and that there are checks in place to prevent and detect errors or fraud.

How does the script suggest dividing responsibilities among team members to enhance internal controls?

The script suggests having two people count the money, a third person deposit it, and a fourth person record the transaction and generate a report, with each person having limited access to other steps to prevent fraud.

What does the script hint at for future content related to internal controls?

The script hints at the creation of an entire course on internal controls in the future, providing a more in-depth exploration of the topic.