Application in small business
Definition of Internal Controls Internal controls in accounting refer to the series of processes developed for the promotion and protection of effective and sound management practices in the case of financial management operations. As such, the implementation of internal controls should enhance the reliability of the financial information that would serve as basis for policy and decision-making on the part of managers and the board; ensure regular and continues company record keeping of assets and other business processes; reflect compliance with business policies; and show compliance with government regulations.
(McPeek & Carlson, 2004; Bragg, 2006) There are three general classifications of internal controls. First are the detective types, which involve processes, intended to identify any irregularities or mistakes arising during the operations of the business firm. Second are corrective types that provide solutions to the identified irregularities or mistakes. Third are preventive types that involve the application of measures to avoid irregularities and mistakes from occurring. (McPeek & Carlson, 2004)
Five major components require consideration to achieve internal control objectives. One is the control environment that covers the alignment of personnel with financial management policies, development of committed attitudes towards rational financial management practices, and exercise of competence and accountability by employees. Another is risk assessment that encompasses the firm’s competence in effectively recording, processing, summarizing and reporting financial data by using technology and development of recording systems.
Another are control activities that operate in ensuring that the firm considers actions that avert risk through performance checks or reviews and security measures. Still another is communication of information recording and reporting responsibilities and the collation of information using a uniform system of organization. Last is monitoring, which is the continued assessment and improvement of internal controls. (McPeek & Carlson, 2004)