Internal controls are the routines a business uses to protect its assets and keep its records reliable. To score in a written answer, name the control and then state which risk it reduces.
This lesson is part of SPM Accounting controls. It explains why the bank reconciliation and control accounts you calculate are worth doing.
What are internal controls for?
There are four purposes you can name. The first is to safeguard assets such as cash and inventory. The second is to reduce errors and fraud. The third is to keep accounting records accurate, and the fourth is to give the owner reliable figures for decisions.
Controls are either preventive, so the problem cannot happen, or detective, so the problem is found quickly.
Worked example: one small shop
Kedai Maju is an original example of a small shop where one assistant takes cash from customers, writes the daily sales record, and banks the money. Takings for the day are RM1 450.
If the assistant keeps RM200 and records sales of RM1 250, nobody can see the difference. The record agrees with what was banked, but it does not agree with what was really sold.
| Control | Type | Risk it reduces |
|---|---|---|
| A second person counts the cash and signs the record | Preventive | One person keeping cash and hiding it in the record |
| Receipts are pre-numbered and every number is accounted for | Detective | Sales made but not recorded |
| Takings are banked the next working day | Preventive | Cash being lost or used before banking |
| The cash book is reconciled with the bank statement monthly | Detective | Missing deposits, unrecorded items and errors |
| Receivables and payables control accounts are prepared | Detective | Posting errors in the individual ledger accounts |
With the second person counting, the RM200 is noticed on the same day. That is the point of the control, not the tidy layout.
A template for your answer
Use the same three parts for every control. Name it, say how it works, and state the risk or the purpose.
For example: “The business should separate the duties of receiving cash and recording sales. This means one person cannot take cash and change the record to hide it, so the assets are safer.”
The mistake that loses marks
The common slip is to write a list of controls with a generic reason such as “to avoid errors”. A marker cannot give marks for the same vague reason five times.
Replace the generic phrase with the specific risk from the situation. In the shop, the risk is cash kept by the person who records sales, not “errors” in general.
Check yourself
In a small firm one clerk approves supplier invoices and also prepares the payment cheques. State the risk and suggest one control.
Answer
Risk: the clerk could approve a false invoice and pay it to themselves, and nobody else would see it.
Control: separate the duties. One person approves invoices, and a different person prepares and signs the cheques after checking the approval.
This works because a false payment now needs two people to act together, which reduces the chance of fraud.
What to study next
Move on to tracing unmatched items without double counting, then use the accounting controls practice set. Record where your written answers lose marks in the mistake log and paper-error review.
For a teacher to read your written answers and show you where the explanation stops, see online one-to-one Accounting tuition.