What Internal Controls Are Common in the Accounting Cycle?

The accounting cycle is a continual, repeating cycle of events that analyze, record, classify, summarize and report on the financial information of a business. Internal controls built into the accounting cycle serve to prevent inaccurate data entry, protect the business from fraud and maintain consistency within the accounting cycle. Because of this, common internal controls apply not only to the accounting cycle in general but also extend to specific processes and tasks.

Scope and authorization are preventative internal controls. Scope internal controls divide up accounting duties and provide an internal checks-and-balance system that ensures mistakes can’t be made without being uncovered by another authorized user. Authorization functions to safeguard financial information and maintain data accuracy and integrity by limiting access to employees who work directly with financial data and those having a need to know. Authorizations grant privileges based on the role an employee plays within the accounting cycle and the actions an authorized user performs. Accessing information usually requires a user to enter a code or series of numbers that identify the user.

Documentation controls provide evidence for a transaction or series of accounting transactions by creating a paper or electronic trail. Requiring accounting entries to have supporting documentation such as forms, templates and reimbursement logs helps identify and track the actions an employee performs and significantly decrease the chances data will be inaccurate or incomplete. If a mistake does occur, however, proper documentation makes researching discrepancies easier, because it allows an auditor to work backward to the point where the error occurred.

Reconciliation is an internal detection control used to verify that transactions and financial statements are correct. It involves comparing accounting entries with supporting documentation, verifying each entry is categorized correctly and that the amounts entered are correct. Matching original entries with supporting documentation also helps ensure that accounting entries weren’t changed after they were initially entered. If mistakes are uncovered, the control process moves to uncovering the source, correcting the error and documenting the process to verify that a review and correction has occurred.

Accounting cycle security controls refer to administrative, physical and electronic security. Define security standards such as keeping financial documents in a secure fireproof location to prevent accidental destruction of records, unauthorized viewing or the disclosure of private business financial information. Security procedures also limit who has access to the secure location and the information it holds and may, for example, include a computer password policy that sets standards for creating complex passwords and for periodically changing passwords.