Internal control- The means by which the management of an organization obtains the information, protection and control that are essential for the successful operation of the business. Effective internal control is achieved with an organizational plan providing segregation of duties, a system of authorization and recording procedures to control assets, liabilities, revenues and expenses, and sound practices to be followed by every employee in performance of duties. Internal control refers to a system of standard procedures and operating activities within a company, designed to minimize the possibility of fraud and improve the accuracy of management information. The internal control procedures are often concentrated within the jurisdiction of the accounting department, but also include the activities of other departments. One of the principal internal control procedures is known as “separation of duties”, which means that the various activities of an accounts receivable or inventory control function are divided between two or more employees rather than concentrating them with just one employee. This approach makes it more difficult for one employee to conduct a fraud without the cooperation of other employees. In very small companies, it is often impractical to divide up the duties in this way, since there are not enough employees and it would be too expensive to hire more just for the purpose of internal control. A second purpose of internal control is to improve the accuracy of operating reports that are routinely submitted to management. These reports summarize information that could be inaccurate unless appropriate internal controls are in place to minimize the possibility of such inaccuracies. For example, certain important types of data like employee pay rates would need to be double-checked and approved by the department manager for each payroll run, to ensure there are no rate errors during the processing of the payroll.

Inventory control- Internal control over inventories assures that reordering is signalled at the appropriate time, inventories are protected against theft and spoilage, differences between book and physical inventories are ascertained and adjusted, proper authorization exists for all removals from stock, and all inventory transactions are accounted for, costed correctly and in a manner that provides adequate information for management.