Two Basic Objectives of Internal Control

1. To protect the assets of the company from theft, improper use, or misappropriation by managers or employees.

2. To enhance the reliability of the financial records. If the internal control in a company is weak, then the financial records (including the financial statements) cannot be trusted.

A List of Internal Control Principles

1. Segregate the Duties--Do not let possession of the asset AND record keeping for that asset to be in the hands of one employee.

2. Establish Individual Responsibility--use job descriptions to specify which duties the employee is required to do, and make it clear which responsibilities the employee is not supposed to do.

3. Adequate Independent Internal Verification--managers must supervise the Internal Control effort. Verify by observation, measurement, and inquiry.

4. Physical, Mechanical and Electronic Controls--cash registers, computers, passwords, etc.

5. Document Procedures--Number the documents sequentially and file properly under lock and key.

6. Other Procedures--bonding of employees, rotation of duties, make employees take vacations.