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Implementing Effective Internal Controls to Mitigate Risks in Business Operations

Description: This paper examines the implementation of internal controls to mitigate risks in business operations.

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    Implementing Effective Internal Controls to Mitigate Risks in Business Operations Based on the internal control procedures outlined in the proposal, explain how segregation of duties contributes to reducing fraud and errors in the purchasing, cash disbursements, and payroll processes. Provide specific examples from the proposal to illustrate the importance of these controls. Word Count Requirement: 500 - 700 words

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    Controls For Outflows Just as a company needs internal controls for inflows of assets, controls for the outflows must be in place to detect and deter errors and fraud. Internal controls are also needed so an organization can conduct business in an efficient manner, protect assets and resources, ensure accuracy of accounting data, produce reliable financial and management data, and ensure observance of the organizations policies and procedures ("Business Dictionary", n.d.). This proposal will offer appropriate controls for the processes of purchasing, accounts payable, cash disbursements, finance, investments, and payroll. Purchasing A company is in business to make money, but to make money it has to spend a large part of its budget on goods and services. These acquisitions can be numerous and involve big dollar amounts so internal control procedures are important to this process. A company should have written policies regarding purchasing activities that are reviewed regularly by management and departmental employees. Consistent review of policies and procedures allow regular understanding of what is expected as well as the realization of needed changes and updates. Many times mistakes are made because employees do not understand protocol or the purchasing functions are falling behind because of rapid company growth. The following suggestions will permit better internal control of purchasing functions: • Segregation of duties – different employees should be assigned to approving purchase s, ordering items, receiving ordered items, authorizing invoices, posting in financial software and maintaining inventory counts. • Maintain ethical buying practices – Determine what purchase amount will require written proposals, review periodically who is authorized within the company to make contracts with

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    external suppliers, verify invoice payment terms and authorize to pay appropriately to take advantage of discounts offered, and reconcile actual purchases against contracts, agreements and purchase orders. • Reconcile purchase orders, packing slips, and invoices – verify that items ordered were actually received or that services were performed, verify the supplier or service provider invoiced for the correct amount, and reconcile the appropriate expenses to the correct general ledger account. If purchases result in an accumulation of inventory, the inventory should be kept in a secure location. Only authorized individuals should be allowed in this location and periodic inventory counts should be done by employees other than the individuals with authorization to receive inventory and that are allowed in the restricted location. Cash Disbursements The objectives of internal control for cash disbursements are to have proper authorization for cash transactions and that these transactions are recorded properly. Segregation of duties happens when a transaction is handled by separate employees, so that no one transaction is completed from start to finish by one person. This is one of the most important aspects of internal controls with cash disbursements. Another aspect of internal controls is to ensure that the check signing within the organization is completed by only authorized management. The number of authorized signers should be used depending on the amount of the cash disbursement. For example, if the check is for $1,500 for reimbursement of travel expenses, management should authorize two signatures for this request. The following is an internal controls checklist that will help in mitigating loss within the organization. • Are all cash disbursements made by pre - numbered checks?

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