Types of Internal Controls

Internal control may be defined as “the whole system of control, financial or otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient way, ensure adherence to the management policies, and safeguard the assets and secure as far as possible the completeness and accuracy of records”

Types of Internal Controls
The types of internal controls are categorized as follows:

An enterprise should have a proper allocation of responsibility to key departments and functions. The enterprise should establish a good plan of organisation popularly known as organisation chart which should among other things identify lines of reporting. Employees should always know precisely to whom they report and who reports to them. The employees should their accountability and responsibility.

Segregation of Duties
Of maximum importance from an internal control standpoint is segregation of duties where no one single person should be given too much powers especially regarding recording, approval and custody of transactions. Several people should be involved in a single transaction to avoid fraud and collusions.

This concerns the physical custody and access to the company’s assets and other resources. Access may be direct or indirect such as through documentation and other authorization. The access may be through other authorization such as through password and other restrictions.

Authorization and Approval
This is a special type of physical custody whereby the employee must be authorization through documentation to perform a specified task. For instance all credit sales must be approved and authorized before the transaction goes through.

Arithmetical and Accounting
This involves the physical checking of the arithmetical and accounting accuracy. It is important for instance to cross check balance before the close of the day.

Procedures should be designed to ensure that personnel operating the system are competent and have the requisite skill to carry out the necessary operations. The personnel must be of high integrity and high training and expertise. The management should put in place the necessary measures to hire, fire, and train, promote and remunerate well the personnel in their employment.

All the actions of an enterprise must be supervised by well qualified personnel. The responsibility and accountability of both the supervisor and the supervised must precisely stated and known to both.

These are controls exercised by the management which are outside and over and above the day to day routine of the system. They include overall supervisory controls, review of the management accounts, variance analysis, internal audits and any other special review procedures

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