Question

Identify the fundamental principles of internal controls.

a) prenumbering of documents
b) authorization of transactions
c) independent checks to maintain asset accountability
d) documentation

Answer 1

The fundamental principles of internal controls include prenumbering of documents, authorization of transactions, independent checks to maintain asset accountability, and documentation.

Step-by-step explanation:

The fundamental principles of internal controls are:

1. Prenumbering of documents: This principle involves assigning a unique number to each document created during a business transaction, such as purchase orders or invoices. It helps in tracking and ensuring that no document is missing or duplicated.
2. Authorization of transactions: This principle involves establishing policies and procedures for approving and verifying transactions. It ensures that only authorized individuals can initiate or approve transactions, minimizing the risk of fraud or errors.
3. Independent checks to maintain asset accountability: This principle involves implementing checks and balances within an organization to ensure the accuracy and reliability of financial records. For example, regular reconciliations of cash balances by someone independent of the cash handling process.
4. Documentation: This principle emphasizes the importance of maintaining proper records of all financial transactions and activities. Documentation provides evidence, supports accountability, and facilitates auditing and internal control review processes.