Please respond to monica with 200 words
Fraud is a dishonest act by an employee that has a benefit to the employee and at a cost to the employer. Internal control consists of methods and measures that are taken by an organization or company to help limit the amount of fraud that takes place. There are five main components that make up “internal control”.
1) Control environment, where management makes it clear that integrity is crucial and unethical activity is not tolerated. 2) Risk assessment where companies analyze the different risk factors and how to manage them and keep them minimal. 3) Control activities where management puts policies and procedures in place to reduce fraudulent activities from being done. 4) Information and communication ensuring information is captured and then communicated to the correct chain of command as well as to external parties. 5) Monitoring of the internal control systems to ensure adequacy, which will also allow for deficiencies to be noted and reported to upper management and/or board of directors.
There are six activities in place with the internal control system, though not flawless, can help significantly reduce fraud from occurring. In actuality, the only way these control activities do not work, is when two or more employees are working together in the fraudulent activity. The activities in place are: 1. Establishment of responsibilities, 2. Segregation of duties, 3. Documentation procedures, 4. Physical controls 5. Independent internal verification, 6. Human resources controls.
When it comes to the accounting part of internal controls, much of the same protocols are followed to lessen the risk of fraud. Using a bank is a type of control used, as they are an outside entity and not involved with the company. The bank keeps records for the customer, and those records do not necessarily reflect the same records as the company. The bank statement, issued each month from the bank to the customer allows for the customer to compare records and reconcile them, so that they can see what items have been paid, are awaiting payment, if there have been any entry errors, if there are any returned checks, or insufficient funds. Another control activity that is used in the accounting is the segregation of duties, by making sure the employee who does the reconciliation of the bank account does not have any other responsibilities pertaining to cash in the company. The bank statement is compared with the company balance ledger and the balances are shown to equal each other. Without the journalizing and posting the account will not show the correct balance. If there is a discrepancy, either an adjustment is added to the ledger due to an error, or the bank is contacted to have the error corrected on their end.
Internal controls are necessary to manage a company and to minimize the amount of risk factors and fraud that take place within a company.
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