Internal controls are procedures companies develop to safeguard their assets and to produce accurate, reliable financial statements. When a company does not have strong internal control procedures, fraud can occur much easier. Organizations should protect themselves from possible threats by monitoring their internal control systems often and adjusting them to be stronger.
Inaccurate Financial Statements
If an organization discovers there are inaccuracies in its financial statements, there might be a problem with the organization’s internal control system. One basic fundamental of internal controls is the principle of separation of duties. This means that different employees handle different areas of the accounting duties. If the same person handles all duties, it is a sign of a weak internal control system. If inaccuracies occur in the financial reporting, a company should look into the accounting procedures it uses.
If a company cannot find certain documents, such as invoices or purchase orders, this might be another sign of weak controls. An organization develops procedures for recording, posting and filing documentations. If a document is lost, there is a good chance that there are problems in the company's processes. If one employee has too much control, he may manipulate documentation to deceive the company.
Lack of Written Procedures
Every process and activity an organization uses should have written procedures to follow. Without written procedures, employees may not know the proper procedures and may complete activities the wrong way. A strong internal control system has written procedures and policies for all business activities.
Another sign of a weak internal control system is a higher than usual number of customer complaints. Organizations should develop a system to ensure that customers are pleased with the products and services. If there are a high number of complaints, management should look into the problem and understand that there might be a weakness in its internal controls.
Organizations hire auditors to determine how accurately the financial records are being kept. An audit will uncover problematic areas, threats, risks and other potential problems. If a company does not hire an auditor on a regular basis, these threats will be harder to detect. It is a regular business practice for companies to have audits completed on a regular basis.
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