Accounting Information Systems: The Processes and Controls, 2nd Edition

MAINTENANCE OF ACCOUNTING INTERNAL CONTROLS (STUDY OBJECTIVE 10)

Much of the early part of this chapter focused on the nature and sources of fraud. Understanding fraud makes it easier to recognize the need for policies and procedures that protect an organization. Internal control systems provide this framework for fighting fraud. However, attempting to prevent or detect fraud is only one of the reasons that an organization maintains a system of internal controls.

The objectives of an internal control system are as follows:

1. Safeguard assets (from fraud or errors).
2. Maintain the accuracy and integrity of the accounting data.
3. Promote operational efficiency.
4. Ensure compliance with management directives.

To achieve these objectives, management must establish an overall internal control system, the concept of which is depicted in Exhibit 3-4. This control system includes three types of controls. Preventive controls are designed to avoid errors, fraud, or events not authorized by management. Preventive controls intend to stop undesirable acts before they occur. For example, keeping cash locked in a safe is intended to prevent theft. Since it is not always possible to prevent all undesirable events, detective controls must be included in an internal control system. Detective controls help employees to uncover or discover errors, fraud, or unauthorized events. Examples of detective controls include matching physical counts to inventory records, reconciling bank statements to company records, ...