The Purpose of Internal Accounting Controls

Posted by: Patricia Barlow Post Date: 19th January 2016

Finances are open to financial fraud, which can be detrimental to the business, staff and other stakeholders. Therefore, businesses need to be able to prevent fraud as much as possible by having effective internal accounting controls in place.

Let’s take a look at the purpose of two of the most important internal accounting controls.

Traceability

One important control is ensuring that all transactions are traceable. This means that money received can be traced to the invoice that was raised, and that this in turn can be traced to the original order placed by the customer.

Purpose of internal accounting controls

This works the same for supplier payments. Payments need to be related to the invoices that have been received, which in turn need to be checked to delivery notes, and these to the original order raised.

Having this checking process in place means that money is not being paid or received unless it relates to the business.

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Segregation of duties

Another control that can be put in place is the segregation of duties. This means that, where possible, a single task or process should be split between two or more people, so that they can check each other’s work.

For example, the same person should not raise the purchase order and authorise the payment of the invoice. This is because the person raising the order could be ordering things for their own personal use. Having a different person authorising the payment will make fraud far less likely.

Accounts systems should be regularly evaluated to ensure that all aspects of fraud are being prevented, or that there are processes in place to report any issues of concern. This can also be helped by ensuring all accountants work in line with common ethical principles.
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Understanding the purpose of internal accounting controls is essential for aspiring accountants, or even business owners and managers involved in finance. Qualifications like the AAT give you the knowledge you need to manage internal controls effectively.

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