Internal Control By: Maurio Levy November 28, 2011 Axia/University of Phoenix XACC/280 Christy Stephenson

Assets are defined as resources that a business owns to generate potential services and benefits. It is the assets of an organization that help it achieve its operational goal of profitability; they are the resources that allow an organization to provide goods and services to generate profits. Those assets could be current assets that generate benefits within the current accounting period such as cash, accounts receivables, inventory, and prepaid expenses; or longterm which are resources that benefit a number of accounting periods such as property, plant, and equipment. Assets could also be intangible such as patents, goodwill, and trademarks. The characteristic that all these assets have in common is the fact that they are the profit generating blocks of the organization. It is because of the importance of assets that internal controls are a very important part of business operations. Internal Controls are procedures and processes specifically designed to make sure operational efficiency and effectiveness of the organization is met. Internal controls two main objectives are assets safeguarding and enhancing the accuracy and reliability of accounting records. Assets are a companys most valuable resource; they need to be protected against theft and unauthorized usage. Internal controls are accordingly defined as policies and procedures that: provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements." The achievement of accuracy and reliability enhancement is by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. Under the Sarbanes-Oxley Act, all

publicly traded U.S. corporations are required to maintain an adequate system of internal control. Companies that fail to comply are subject to fines, and company officers may be imprisoned. To emphasize the importance of the Sarbanes-Oxley Act, a poll has been conducted, and it was found that 60% of investors believe that SOX will help safeguard their stock investments. Many say they would be unlikely to invest in a company that fails to follow SOX requirements As with the case of any decision or policy that is undertaken or implemented by management as to which internal control procedures to follow, costs must be carefully weighed against benefits, and I believe that one of the biggest limitations on internal control is the fact that sometimes the costs of implementing internal control procedures might outweigh the benefits. For example, in the case of a small grocery store, it might be costly to make deposits daily at the stores bank; making weekly or biweekly deposits to a secure safe deposit to save on deposit charges. As pointed out in the book, in large retail store might find it costly to stop and search customers when leaving the stores to guard against shoplifting, yet again such a problem could be resolved by implementing some electronic controls such as hidden cameras, bar codes and the like. The advantages and disadvantages of each of the internal controls could be detected from comparing some of such controls: (1) establishing responsibility: under this control measure control is most effective when each person is responsible for a given task, (2) using physical, mechanical and electronic controls: some of these measures relate to the safeguarding of assets, while others relate to the safeguarding of assets as well as enhancing the accuracy and reliability

of the accounting records, yet in both cases such a measure decrease the reliance on the human element which is one of the limitations on internal controls since A good system can become ineffective as a result of employee fatigue, carelessness, or indifference , (3) segregation of duties: this measure is based on the premise that the work of one employee should provide a reliable basis for evaluating the work of another employee and finally (4) independent internal verification which involves the review and comparison of data prepared by employees; such a verification should be conducted by an employee who is independent of the personnel responsible for the information. Conclusion: Internal controls are very important when it comes to safeguarding assets as well as ensuring the reliability of accounting records to avoid the possibility of bankruptcy. They are a crucial part to keeping shareholders, investors, and the companys investments protected.

References: Chapter 8: Internal Control and Cash. Retrieved November 27, 2011 from the University of Phoenix Student Website.