What Principles of Internal Control Apply to Most Business Enterprises?


Internal controls help govern a company’s operating environment. For example, publicly held companies must set proper internal controls in place to help prevent fraud in their reported financial information. While specific controls can be different for each company, several basic controls apply to all businesses. A company can institute these controls to ensure that it operates in the safest environment possible.

Separation of Duties

A common internal control is the separation of duties. One employee cannot be in control of too many tasks that relate to each other. For example, a cashier should not be able to write a deposit. This has the potential for embezzlement, as the cashier can skim cash from the drawer. Though these types of controls require more employees to complete tasks, multiple individuals involved in a process prevent one person from taking advantage of the business.

Employee Guidelines

Companies may have specific employee requirements. These can include hiring quality employees with clean backgrounds, bonding employees, requiring mandatory vacations and limiting an employee’s authority. The purpose of these controls is to avoid hiring bad employees, thus eliminating high-risk individuals from getting the opportunity to manipulate internal business activities. The use of time clocks and employee pass cards also helps ensure that employees do not gain unauthorized access to specific areas.

Physical Controls

Physical controls are also a necessary internal control. For example, valuable inventory may be in a secure location with access limited to a few employees. Financial documents — such as payroll records — may also be in a secure location. Locked cabinets and drawers are two common ways to protect a company’s physical documents. Locked buildings are another form of physical controls, along with building alarms or security cameras.

Pre-Numbered Documents

Documents in a company typically have a number associated with them. For example, purchase orders may start at 0001 and continue in perpetuity. Accountants review these documents to ensure that they account for all pre-numbered and issued purchase orders. Checks, invoices, receiving reports and similar documents can all have a pre-numbered system that allows for monitoring documents in the accounting system.

Internal Verification

Internal verification is the managerial review of items within a company. This includes employee work reviews, visits to each department within the business and the research of exceptions or problem reports. Internal auditors are often part of this process. These individuals — though employed by the company — can provide a partially independent review of a company’s operations. Another purpose of internal verification is to ensure that all internal controls work properly.

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  • "Fundamental Financial Accounting Concepts"; Thomas P. Edmonds, et al.; 2011
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