An Analysis of the Process of Setting Up Internal Controls

Internal controls are methods or procedures adopted in a business to:

• Assist in achieving the businesses’ objectives
• Ensure financial information is correct and reliable
• Ensure cooperation with all operational and financial requirements
• Protect its Assets

They are essentially checks and balances within a business. It’s objective is to reduce errors, limit financial losses and prevent fraud. They also segregate duties within the company and limit one persons control over an entire area. For example- never have one person writing, receiving and reconciling your business accounts.

As the owner of Millennium Land Developers, it is your responsibility to ensure that the business has
a good internal control system. As they flow through the entire business to:

Help align objectives of the business:

To make sure everything is covered in the reporting procedures and the activities currently undertaken by the business are in line with the objectives of the business.

Safeguard assets:

Makes sure the physical and monetary assets of the business are safe from theft, errors and fraud.

• Prevent and detect fraud and error.

Enabling the internal control system quickly identifies fraud and errors when they occur.

Allow action to be taken against undesirable performance:

A method of dealing with dishonesty or fraud if detected

Reduce exposure to risks:

Minimising the probability of any unexpected events happening

Ensuring proper financial reporting:

Maintains complete and accurate financial reporting requirements by management and legislation
and minimising lost time by fixing mistakes and ensuring resources are efficient and mistake free
when allocated

Completeness

That all the required information are included in the business reports.

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These include transactions and
records.

Accuracy

Making sure that the right amounts are recorded into the correct accounts

Authorisation:

Makes sure the correct level of authority deals with approvals, computer access and payments etc.

Validity

That the documents for the activity performed have incurred the liability

Existence:

Makes sure the existence of an asset or liability has been received. Whether or not a purchase has been received for goods or service.

Error handling:

Makes sure that any errors in the system have been identified and processed

Segregation of duties:

Maintains certain duties are performed by different positions and kept separate.

Presentation and disclosure:

Ensures the financial reports are in line with regulations and principles. A good system of internal controls will help the business in numerous ways. These include:

• Error Reduction

With a good system of internal controls, it will ensure that mistakes will be minimal and this will save time and money for the business.

• Protection for staff

With an internal control system, staff will have the protection of the system to back themselves up if in any way there is a dispute with an action. The employee can say that he/she acted in the way noted by the internal control system and acted within their limits resulting in the business not being
able to blame the worker.

Detection:

A good internal control system will deter future criminals committing a crime against the business such as fraud, as there is a higher chance of being detected and getting caught. There are four steps in setting up a Internal Control System. Plan- determine what controls are required to run the business.

• Do- Implement the planned controls
• Check- monitor the performance of the controls

Act- modify the system to take account failures or changes in circumstances, etc I suggest to start at the low end of procedure these include:

• Password access to computers
• Balancing ledger accounts

To set up a internal control system, you have to identify any events that will impact the business negatively such as loss of sales, computer system failure or a fire. After that, establish the problems that these events will have on the business and attempt to solve them, unhappy customers or failure of the business). After deciding what is required to prevent the occurance of the event, detect if any event has occurred and to reduce impacts upon the business.

The records of these events will be used in case anything like this ever happens and can be identified to act on the situation. As the owner, you have the responsibility and accountability for the effectiveness of the internal control system. Bank reconciliation statements enable the business to compare the business bank account records to the bank’s records of the accounts balance in order to uncover any possible mistakes. Because there is a difference between the time data is entered into the bank system and when data is entered in the individual’s system, there are sometimes a difference between account balances. The goal of reconciliation is to determine if the difference is due to error rather than timing. I highly recommend to do a bank reconciliation monthly as you can be more confident that your current records are correct and it is easy for your tax agent to prepare the businesses income tax return or activity statements faster. Any extra transactions that go through the accounts can go through unchecked and end up costing the business money. Such as: Interest charges, bank fees or direct credits or debits.

A cash budget is an estimate, for a future period of cash receipts and cash payments. The cash budget shows how in the future you will be able to pay any debts and expenses. A properly prepared cash budget will show how cash flows in and out of the business. It is also used in planning the businesses short term credit needs. Any financial institution will expect you to prepare a cash budget before making any capital expenses for any purchases of new assets, or any expansion of the business requiring a loan. For example, a preliminary cash budget will estimate how you will be able to spread the payments to any creditors throughout the year. As a result to this planning, less bank credit will be needed and overall interest costs will be minimised.

Any credit-granting firms favor businesses with a budget when a loan is requested. Without proper planning there is a chance that you might not be able to repay loans on schedule and this will incur over due payments. Once you have carefully worked out a cash budget, you will be able to compare it to the cash inflows and out flows of the business. I strongly recommend monthly cash budgets as this will help making estimated cash balances at the end of each month easier and will help in seeing any credit short-falls. All businesses need a good internal control system as they are needed to promote the use of assets, protect staff and resources and communicate and educate staff. They have a positive place within any business and I strongly encourage you to set a good system of internal controls as it will save Millenium Land Developers and help it get through the slump of the real estate market.