What are Accounting Controls?

Accounting Controls are the measures and controls adopted by an organization that leads to increased efficiency and compliance and ensures thatFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more are accurate when presented to auditors, bankers, investors, and other stakeholders.

There are various types of control applied within an organization. Also, there is no specific control policy that applies to every organization. The application of controls for each organization is designed and implemented to suit its needs, type of business, aspirations, goals, and other guidelines.

Types of Accounting Controls

There are three major categories of accounting internal controls.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Accounting Controls (wallstreetmojo.com)

#1 – Detective Controls

As the name suggests, these controls are in place to detect any discrepancy and deviation from the policies in place. It also serves the purpose of the integrity check.

For example – a surprise check of the actual cash balance in hand with the cashier and cash balance as per accounts will ensure if the cashier is doing his job accurately or not. It might also reflect any accounting postingAccounting PostingIn accounting, posting refers to the transfer of a balance from one ledger to the general ledger in order to make the accounting easier to understand. Depending on the size of the company and the volume of transactions, this posting is done at regular intervals.read more error. In a computerized environment where the numbers are huge in volume and end to end processing of accounts is done by the system, in those cases, we might want to put a test invoice and track it till accounts finalization to see if it gives the desired result and it is compliant to regulations.

In the same way, comparing actual physical stock in the warehouse and closing stock as per books will show if there is an issue in the Inventory processing, any pilferage, or normal loss. Also, checking that all the assets appearing in the books are physically present ensures the safety of assets.

For example, we have understood that Detective Controls are applied irregularly and are more of an audit nature to identify errors or discrepancies.

#2 – Preventive Controls

The controls are applied daily within the organization to stop the errors or discrepancies from happening in the first place. We can say these are the rules which everyone within the organization has to abide by in their day-to-day job.

For example – in an accounting environment, when a person books an invoice, it goes to another person for peer review and approval. Once the invoice is accounted for, another team makes the payment. It is called segregation of duties, and it ensures that, daily, one person does not have control of booking and paying invoices.

Job rotation is a classic example of preventive control. In a big organization or at a critical place, the personnel is transferred regularly to ensure that any person does not have access to any data or asset for an extended period, which ensures that the person does not get involved in thefts or illegal activities.

In a computerized environment, backing up data daily on the cloud is also a Preventive control to avoid data loss.

#3 – Corrective Controls

These are the controls that come to the rescue when preventive and detective both the controls have failed to avoid an error. In an accounting environment posting an adjustment or rectification entry is an example of corrective controls. Once the books are closed after the financial year and auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more find an issue to be addressed. Reopening the financial yearbooks and making the adjustments an auditor asks for is also a part of corrective control.

In this case, the trial balance still agrees, and later on verification of ledgers, this error was identified. For example – While posting a journal entry, the accountant has debited Mr. Tom instead of Mr. Robert for $ 500. The rectification entry here is to debit Mr. Robert and credit Mr. Tom by $500. It is called corrective control.

Accounting Internal Control Examples

Below are examples of accounting controls.

  • Segregation of duties – processor and approver should be two different people. An independent user id and passwords should be provided to all the employees.Physical verification of Inventory and Assets should be done.Bank reconciliationBank ReconciliationCustomers perform bank reconciliation to tally their records with their respective bank’s statements because there may be differences between the customer’s books of accounts and those of the bank.read more and other Trial balance reconciliations should be done.Standard Operating ProcedureStandard Operating ProcedureThe full form of SOP is Standard Operating Procedure & it is a set of guidelines, policies, & procedures that a Company follows to perform its routine tasks following the industry regulations. read more documents should be made regarding process flow.Surprise check of petty cash and cash bookCash BookThe Cash Book is the book that records all cash receipts and payments, including funds deposited in the bank and funds withdrawn from the bank according to the transaction date. All the transaction which is recorded in the cash book has the two sides i.e., debit and credit.read more balances.

Advantages of Accounting Internal Controls

Below are some of the advantages of accounting controls.

  • The action log identifies the person responsible for any error.Accuracy of financial statements and funds applicationEfficient use of the resources for the intended purposeHelpful in audit facilitationA strong foundation for a more significant growthIdentification and rectification of any discrepancy identifiedSaving of cost and resources

Disadvantages of Accounting Internal Controls

Below are some of the disadvantages of accounting controls.

  • Sometimes irritating and time-consuming for employeesThe high cost of maintaining controls and standardsOverdependent on financial statements and auditDuplication of work

Essential Points to Note about Change in Accounting Control

  • Any change in one process impacts the other.The change should not be made in the middle of an accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more, as it will affect the transaction flow.Any changes should be informed to auditors.Any change should also be documented and communicated well with all the stakeholders.It should be cost-effective.

Conclusion

Accounting internal controls are not a recent development. These have been in place for a long time. The most significant advantage of accounting controls is that it restores the general public’s faith in the public listed companies. The wake of high-value scandals in the United States by companies like Tyco and Enron shook the general public’s confidence in the accounting system.

SOX also known as the Sarbanes-Oxley ActSarbanes-Oxley ActThe Sarbanes-Oxley Act (Sox) of 2002 was enacted by the US Federal Law for increased corporate governance, strengthening the financial and capital markets at its core and boost the confidence of general users of financial reporting information and protect investors from scandals like that of Enron, WorldCom, and Tyco.read more, was enacted by the United States Congress to protect the stakeholders from corporate accounting scandalsCorporate Accounting ScandalsAccounting Scandals refer to situations which demonstrate intentional falsification or misrepresentation of financial documents. Some of the most famous ones are by Enron, Freddie Mac, HealthSouth, & American Insurance Group etc. read more. This also makes it a compulsion for organizations to follow corporate disclosure guidelines and other requirements. The point here is that accounting controls are nowadays an integrated part of any organization, without which the accounting system is like a car without brakes, and no one wants to take a ride in such a car. So any organization which aspires to grow big and better must have robust accounting control in place.

This has been a guide to what accounting controls are and their definition. Here we discuss the top 3 types of accounting internal controls along with examples, advantages & disadvantages. You may learn more about accounting from the following articles –

  • Examples of Cash BookAccounting Functions5 Responsibilities of AccountantAccounting for Accruals