Sample Solution

Internal control is a system of processes and procedures designed to ensure the accuracy, integrity, and reliability of financial information provided by an organization. It also serves to protect assets from theft or misuse, guard against fraud, and promote efficient operations (Kimmel, Weygandt & Kieso 2021). The objectives of a well-designed internal control structure are to ensure accurate accounting records; provide reasonable assurance that operations are conducted in accordance with management’s authorization; safeguard company assets; prevent errors and fraud; promote operational efficiency; detect noncompliant behavior within the company; and ensure compliance with applicable laws (Weygandt et al., 2021).

The primary components of an effective internal control structure includes the segregation of duties among personnel handling cash, establishing adequate authorization for transactions such as purchases or payments; requiring periodic reconciliations between related accounts like accounts receivable and sales revenue ; maintaining physical controls over access to assets like cash , securities , materials , inventory , etc.; implementing routine checks on data entered into systems ; instituting rules on account balances including overdraft protection ; providing dual custody when needed such as having two people sign off on high value transactions ; issuing monthly bank statements directly from banks instead of relying solely on employees’ reports (Harrison & Horngren 2019). Having these measures in place helps organizations identify any potential risks associated with their business activities.

In addition to implementing strong internal controls over finances, it is just as important for businesses to be mindful about how they report their cash balance sheet . Cash should be classified into operating , investing or financing activities based upon its intended use . For example if a company purchases new equipment then the cash used would be classified under investing activities . Likewise, if the same company uses money from investors or lenders it should classify this under financing activities (Kimmel et al., 2021). Additionally, managing receivables is important because it ensures that customers pay what they owe while still providing them with incentives to do so. Estimating uncollectible accounts can also help maintain accurate financial books by reducing reported earnings due to unpaid debts which can minimize audit risk in case there are discrepancies found during an examination period (Gitman & McDaniel 2016).