Chapter 4: Systems of internal control and reducing fraud
Imagine that you are travelling on holidays. It is your dream trip! Where are you going? What are you doing and seeing? Think about your assets on your trip – your cash, your supplies (clothing, phone, toiletries) and prepaid assets like tours and hotels you booked and paid for before you left home. While you’re travelling, it is really important to keep your assets safe – from accidental loss and damage, and from theft and you want to avoid getting caught in a tourist scam! What do you do?
Perhaps only take a certain amount of cash out with you every day, or wear a special pouch under your clothing to store more money. You might wear your backpack on your front to decrease the risk of a pickpocket stealing from your bag. You could check the Australian Government SmartTraveller website before you leave so that you are aware of common tourist scams.
Just like you, as an individual, want to protect your assets – businesses need to do exactly the same. For a business it can be more complicated – more staff, different locations – the business owner can’t keep an eye on everything at the same time, the larger the business, the greater the risk to its assests.
This is where understanding internal controls and the risks of fraud come into play. Fraud is defined within Australian Auditing Standard ASA 240 as:
If we can identify WHERE there is a higher risk of fraud, we can implement CONTROLS to minimise that risk occurring. Thus protecting the assets of the business and the equity of shareholders/owners.
In this chapter, you will learn how to:
- Understand the framework for systems of internal controls
- Identify risks to a business using the fraud triangle
- Identify who is responsible for implementing internal controls
- Understand the role of accounting and accounting systems in internal controls
- Identify common components of internal controls
- Design internal controls
- Understand internal controls over cash
Listen to the audiobook for this chapter on Soundcloud – Chapter 4 audiobook [69 minutes] (opens link in new tab)