CHAPTER 1: INTERNAL CONTROLS
1.1 Introduction
Internal controls are an essential foundation for any organization, regardless of size or complexity. An internal control system is designed to ensure timely and accurate financial information that is free from irregularities or errors. This chapter will take a detailed look at internal controls. To begin, it is important to understand that the AR process is critical to an organization’s financial statements. Each step of the process—from invoicing the customer through collecting the cash—creates a journal entry to the general ledger. The financial reports are created from the general ledger. The accuracy of the AR ledger is essential in providing an accurate picture of the financial health of the organization. for example, if the customer is invoiced but the invoices are never paid, this results in falsely overstated revenue. Overstating revenue is, at the least, poor and incompetent management and could have negative consequences for the organization. At worst, it is fraudulent and will likely result in more dire consequences.
In addition, internal controls are a defense against two things:
1. Errors – which, among other things, can negatively impact customer relations; and 2. Fraud – the intentional misappropriation of the organization’s assets, particularly, its cash. It is necessary that organizations understand which internal controls are needed and where best to place them. Organizations must include internal controls in the accounts receivable (AR) policy and procedures to ensure that they are carried out and monitored for effectiveness.
The design complexity of the internal control system required depends on the complexity of the organization’s operational processes.
All internal control systems have four key objectives:
1. Promote efficient processes; 2. Safeguard the organization’s assets (for AR that means the cash); 3. Provide reliable, timely, accurate, and consistent financial reporting; and 4. Comply with applicable laws and regulations.
No organization can protect itself from all risk, but implementing proper controls offers at least some degree of protection. Internal controls should be a part of each step in the AR process. It is important to understand that the responsibility for safeguarding the organization’s assets and resources through internal controls belongs to every employee, not just the internal control or internal audit department or the finance and accounting groups. Everyone working in AR must have a control mindset.
12
THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
Made with FlippingBook - Online catalogs