How Internal Controls Are Used in Business

Introduction

This paper is going to discuss about internal controls in business, the inappropriate cash procedures, and the inappropriate inventory procedures and conclude with recommendations. The aim of internal controls is to create an environment where, mistakes get low chances of occurring and dishonesty cases are easily caught. Although some of the internal control principles seem plain old common sense, those who have ignored them at some point can confess what it cost them.

Anderson (2008) argues that, this is a process implemented by a company’s Board of Directors and Management, and it is put in place to ensure reasonable assurance in effectiveness and efficiency of operation in the business reliability of reporting, complying with rules, laws and regulations governed by GAAP, FASB, and GASP. Environmental control, risk assessment, control procedures, monitoring of all of the above (the overall system) are the five key elements of implementing internal control.

The role of internal control is mainly to protect a company from malice like fraud and give the company a chance to comply with principles of accounting which are considered appropriate and they are referred to as Generally Accepted Accounting Principles (GAAP).

These issues protect the company from fraud, collusion, and crime injuries. Generally internal control aids in informing the management the inconsistencies, poor production and inadequate production by both personnel and equipment.

Types of internal control

According to Anderson (2008), there are three types of internal control which include; detective controls which are designed to detect irregularities and errors which may have occurred. The second one is the corrective controls which are designed to correct errors and irregularities which could have been detected and the final one is the preventive controls which are designed to keep errors or irregularities from occurring in the first place.

For instance, internal controls encourage strong promotions that can produce high quality goods and services at the lowest cost possible. This is achieved by limiting excessive inventory, high equipment goods and excessive utilities. Operational costs should be maintained within a reasonable budget.

One of the inappropriate cash procedures in this business is the banking of daily takings by whoever available. Not everyone is trustworthy and money at hand is very tempting. B. Pitt the business owner could assign one trusted person to be receiving this money and banking it so that he will account for any losses. Another inappropriate cash procedure is the taking of money from cash registers by any assistant to pay for small expenditure items like milk and stationery. One can steal and deny that he spent the money on these small expenditures. The third one is lack of checking bags of staff to ensure maintenance of security; this will encourage theft as these staff members will always know that no one bothers to check their bags as they leave work. B. Pitt should ensure restriction access to petty cash; keep cash transaction to minimum and keep money coming in separate from money paid out (Rezaee 2002).

Inventory management is very crucial in any business. If inappropriate inventory procedures are used in any business it is bound to break down and profitability can be easily eroded. Some of the considerations that B. Pitt need to put in place are; to ensure appropriate inventory procedures are put in place and some of them include; establishing benchmarks and quantifying opportunities for improvement, he should evaluate and develop policies and procedures for his company, optimize inventory holdings and replenish and align systems and functionality to business requirements and above all, train his employees in order to improve the current inventory management approach. Training will reinforce the basic principle and improve competency levels (Rezaee 2002).

Recommendations

B. Pitt should select his employees carefully and this can be done by using background checks that will have information about their employees’ prior critical records. He can also access reference checks if education verification is mandatory. He should strictly supervise his employees on a regular basis and this can be made easy by installing covert or overt video equipment to supervise the employees’ actions. He should improve the business accounting system by having one individual responsible for it and not any employee.

B. Pitt should consider limiting each employee to a specific task to end confusions so that if something goes wrong some where, he knows who to ask. Cases like any assistant can do this and that should stop for Hats Galore to continue operating effectively. He should also ensure staff bags are checked always before they leave so as to maintain security. Not anybody should unpack stock when delivered, there should be somebody employed for this work. B. Pitt’s number of employees is still low and he should consider employing more so that all the departments get enough personnel.