Internal controls are essential for protecting a company’s resources and for protecting it from fraud. Certain systems are established at the operational and management level to ensure the company’s resources are directed in ways intended by the board of directors and upper level management.
Transaction controls monitor the basic transactions of a business like sales, collections, purchases, payments and payroll. Asset controls are put into place to oversee various assets like cash, investments, receivables, inventories, and plant and equipment. Equity controls set up procedures to manage the obligations assumed by a business.
To operate, a business undertakes various obligations. These obligations can be closely monitored through the establishment of various internal controls.
- Accounts Payable: Accounts payable must be settled regularly. At the end of the month, the total individual accounts payable is compared to the general ledger control account. Statements from suppliers are compared with amounts shown as payable. Of course, any differences found must be investigated.
- Short Term Debt: The authorization to borrow is typically in the hands of one or two senior officers. An upper limit is established. Any notes payable should have two signatures for added checks and balances.
- Long Term Debt and Equity: The board of directors should approve any long term debt and equity financing needed by the company.
It is the practice of large companies to hire an independent agent like a trust company to serve as registrar and transfer agent of their securities. They may also appoint independent agents to perform the function of interest and dividend payment agents as well.