Internal Control Systems

Importance of This Chapter

The regulatory environment places a considerable emphasis on controls, if only to reduce fraud and improve the accuracy of financial reporting. This chapter includes many examples of internal controls and fraud situations, and so serves as the starting point for a detailed corporate controls examination.

Historically, the reason a company places emphasis on its internal control systems is to keep fraud from occurring. Although reducing fraud losses is still a valid concern, more companies now emphasize internal controls because they monitor the consistency with which transactions are completed. This change in emphasis has been brought about by the realization that a company can generate a significant competitive advantage by improving the quality and speed of delivery of its products by tightly monitoring its systems. Thus, internal controls are used not only to combat fraud but also to monitor the consistency and completion speed of transactions.

Besides objectives, this chapter also notes how responsibility is assigned for various controls. This is not a simple issue, because controls spread across many departments, making it difficult to pin down the reason for a control failure. In addition, the chapter contains an elementary set of control points that are useful for controlling the most basic company functions. Though by no means complete, they give the reader a rough overview of the types of controls that a controller ...

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