Definition: The principles of internal control are the concepts that require management to set procedures in place to ensure company assets are safeguarded. In other words, these are the principles management uses to establish the ways to protect company assets.
What Does Principles of Internal Control Mean?
The main internal control principles include:
- Establish Responsibilities
- Maintain Records
- Insure Assets by Bonding Key Employees
- Segregate of Duties
- Mandatory Employee Rotation
- Split Related Party Responsibility
- Use Technological Controls
- Perform Regular Independent Reviews
The subject of internal controls is always expanding and this list of principles will probably expand in the future as well. This is just a list of the most common and influential ones. That being said, these principles are the basis by which management uses to create and implement the internal controls it establishes. In other words, these are the basic ideas of controls. They aren’t controls in and other themselves. Management must take these ideas and apply them to their specific business. Let’s take a look at an example.
Segregation of duties is one of the most recognizable and common controls in most organizations, so we will look at that one. It’s a good control to make sure that the recording and record keeping functions are separate from the actual handling of cash. This is why the cashier is in charge of collecting cash from customers and possibility delivering it to the bank deposit box. The bookkeeper or the accounting department is in charge of recording the cash receipts and doing the bank reconciliations.
This way one single person can’t take the money from the customer, embezzle it, and cover up the thief with fraudulent bookkeeping. If two people perform these jobs, the only way fraud will be able to work is if each person is in collusion with the other. Obviously, two colluding employees are far less likely than a single employee stealing.
This is just one example of how the segregation of duties principle can be applied to a company’s internal controls procedures.