Purpose of an Internal Control System in Accounting

Internal controls are policies instituted by companies to safeguard their accounting and operational processes and information. The size and scope of internal controls depends on the company’s departments and operations.

Facts

Accounting internal controls provide rules and standards to protect a company’s financial information and limit accounting errors. Managers also monitor internal controls to prevent fraud or theft by employees.

Function

Internal controls create specific work flows for each accounting department and describe how each transaction should flow through the department. Each individual working under the internal control system is held accountable for how they process financial transactions.

Considerations

When developing internal controls, companies should consult with an external auditor to ensure that all accounting rules are followed. Auditors will test the company’s internal controls as part of their audit procedures.

Expert Insight

Publicly held companies are required to meet the internal control specifications of the Sarbanes-Oxley Act of 2002. This legislation imposes specific internal control guidelines on companies and is governed by the Public Company Accounting Oversight Board (PCAOB).

Warning

If auditors release reports indicating material errors in a company’s internal controls, it signals poor accounting practices to outside investors. Failure to institute and maintain proper internal control procedures will hinder a company’s ability to expand via equity investors.

References

• All Business: Internal Control Definition
• Money Instructor: Internal Controls of an Accounting System
• Public Company Accounting Oversight Board