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INTERNAL CONTROLS 2.
In this essay you will find an introduction to internal controls. What internal controls are and how
internal control systems work in accounting. Also as you continue to read you will find out how the
Sarbanes - Oxley Act of 2002 has affected the internal control systems in many businesses. Also some
elements of internal controls along with some limitations of the internal controls systems. You will also
find out some reasons why a company's internal controls are the reason why the company may
experience a fall in their price of stock. You will also read about some elements of internal controls.
INTERNAL CONTROLS 3.
Internal control is a plan of organization and all the different methods and procedures used by a
business to help the company monitor its assets. Internal control can also prevent fraud and help the
company eliminate errors. It is a system designed to correct errors and ensure that all manager policies
are followed. There are many more things that internal controls do other than accounting and correcting
errors in the financial departments of companies. Accounting control is another way to assure that all
transactions are authorized and recorded to allow the financial statement preparations to take place.
Administrative or managerial controls usually deal with the operational efficiency. A few of the
administrative or managerial controls are quality control or employee reports. One main thing that
maintains internal controls is the internal audit function. The external auditor is the one who evaluates
the whole internal control system to that determines the different procedures necessary for the
According to www.investopedia.com Sarbanes-Oxley Act of 2002 is an act passed by US
Congress in 2002 to prevent investors from the possibility of fraudulent accounting activities by
corporations. The Sarbanes-Oxley Act also known as (SOX) mandated strict reforms to improve
financial disclosures from corporations and prevent accounting fraud. Sarbanes-Oxley Act was enacted
in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and Worldcom
Shook investor confidence in financial statements and required an overhaul of regulatory standards to
be set. According to Bloch (2003) stated, “The Sarbanes-Oxley Act of 2002 addresses perceived
weaknesses in internal control, the systems a public company employs to collect, process, and disclose
financial information to satisfy its statutory reporting requirements.” Bloch (2003) also went on to say,
“Recent corporate and accounting frauds have demonstrated the inadequacy of internal controls with
regards to revenue recognition. The act also contains requirements aimed at ensuring proper revenue
recognition.” Bloch (2003). “Companies that fail to comply are subject to fines, and company officers
INTERNAL CONTROLS 4
may be imprisoned.” (Ch.8, Internal Controls and Cash).
A company that announces deficiencies in their internal controls would experience a fall in the
price of its stock because certain investors would not be able to know for sure if that company or
organizations statements are correct or not. Let's discuss some limitations to internal controls. There are
a few different limitations to internal controls one being that there isn't a single company that is
completely financially error free and or free from fraud. Also another limitation would be if a company