What Are Accounting Controls? Types & Examples

Accounting controls are methods and procedures that prevent, detect, and correct misstatements that occur within the financial accounting process until the formation of the financial statements. They are one type of a larger set of internal controls that every business should follow. When we talk about accounting controls, we’re referring to controls within the accounting cycle, such as preparing journal entries, posting in the general ledger, and gathering source documents.

In this article, “misstatement” can mean either fraud or error. Fraud is an intentional misstatement with an attempt to conceal its existence, whereas error is unintentional.

We’ll discuss the specific preventive, detective, and corrective controls for the accounting department with a small business setup in mind.

1. Preventive Controls

A preventive accounting control prevents a misstatement from entering the accounting system. It’s the first line of defense, and misstatements spotted here are considered before the fact. An effective preventive control can spot misstated transactions easily at input level. Below are the four common preventive controls:

Objective: Managers or business owners must authorize or approve a transaction before it is performed and entered in the accounting system.

Accounting Controls Examples for Authorization

Expenses above $5,000 must be authorized and approved by the small business owner
Expenses below $500 can be approved by the line manager or supervisor
The small business owner and/or business manager must review payroll calculations and authorize payment before disbursing amounts to employee bank accounts

Objective: Accounting responsibilities pertaining to authorization, recording, and custody must not belong to one person.

Accounting Controls Examples for Segregation of Duties

The person handling accounts receivable must not handle cash receipts or accept check payments
The person authorizing expenses must not handle the disbursement of cash for such expenses
The person handling the business’ cash and checking accounts must not be in charge of reconciling the accounts

Objective: The small business owner or manager must limit employee access to certain aspects of the business.

Accounting Controls Examples for Employee Access and Exposure

Establish annual job rotation programs so that employees don’t stay in a single position for a long time, such as switching accounts receivable (A/R) and accounts payable (A/P) roles
Install electronic access systems like biometric identification systems, one-time passwords, card access, or radio-frequency identification (RFID) systems to limit area or application access

Objective: The employees hired for accounting positions must have the necessary competency, educational requirements, and experience. The small business owner must also be proactive in promoting continuing education and professional development of their accounting employees.

Accounting Controls Examples for Employee Hiring and Trainings

Specify the required work or audit experience, college degree, or certification for the position in the accounting job posting
Conduct background checks through past employer references or ask for relevant documentations such as diploma, academic transcript, or police clearance
Give examinations or sample tasks to assess the applicant’s practical knowledge.
Require psychological assessments if necessary
Sponsor employee’s continuing professional development by paying full or half of the price
Hire resource speakers to conduct one-day trainings, workshops, or symposiums regarding developments in emerging technologies

2. Detective Controls

A detective accounting control uncovers misstatements that have entered the accounting system. These misstatements are considered after the fact, and it’s up to the company’s detective controls to spot where these misstatements lie. Detective controls are your business’ second line of defense because they prevent misstatements that slipped through the preventive controls.

Objective: The small business must ensure that all accounting transactions have proper documentation to support the existence of assets, liabilities, and equity. An established document trail must be in place to enable the small business owner, internal auditor, or external auditor to examine past transactions.

Accounting Controls Examples for Documentation and Documentary Trails

All printed and electronic copies of business documents, such as invoices, bills, contracts, and purchase orders (POs) must be stored for at least five years before deletion unless a longer or shorter period is necessary
Only authorized personnel’s signatures must appear in the document unless another person has been authorized to countersign on behalf of the authorized personnel
The person approving the cash disbursement must sign the check and stamp it as Paid
All requests for payment must be submitted in a voucher package containing the approved requisition form, approved purchase order, sales invoice from supplier, and a receiving report detailing the quality and quantity of goods received
Disposal of fixed assets must have proper documentation that shows how the fixed asset was disposed, such as sale and retirement, the proceeds of the sale, and other relevant details
Foot debits and credits for equality

Objectives: The accountant or bookkeeper must perform reconciliations of accounts to ensure the accuracy and existence of accounting records.

Accounting Controls Examples for Reconciliations

Monthly bank reconciliations
Monthly customer and vendor account reconciliations
Annual or semi-annual inventory physical counts to reconcile inventory account balances and inventory aging report
Annual count of all business assets to determine physical existence of asset records in the books

Objective: The small business owner or a third party accounting professional must perform cut-off testing to determine if all transactions of the current period are recorded in the current period.

Accounting Controls Examples for Cut-off Testing

Receiving reports dated as of the current accounting period must be recorded as current period purchases
Goods shipped (sold) with term FOB Destination, goods held (sold) on consignment, and goods purchased (sold) on a repurchase agreement must not be reported as current period purchases (sales)
Delivery receipts dated as of current accounting period must be recorded in the books as current period sales
Inventory purchased (sold) with term FOB shipping point but are still in transit must be included (excluded) in the physical count

3. Corrective Controls

Corrective accounting controls are directives that aim to resolve weaknesses in preventive and detective controls and correct misstatements. Corrective controls aren’t common in the accounting department since improvements in preventive and detective controls can resolve weaknesses in accounting controls. But for the sake of explaining this concept, here are some examples of corrective controls:

Updating the accounting manual of the business to modify or correct processes that are susceptible to fraud or error
Updating the accounting software regularly to solve software errors in the old version; if you’re using QuickBooks Online, you don’t have to worry about this because web-based accounting software is always updated
Releasing memorandums to instruct accounting employees for minor updates and remedies
Subjecting poorly performing accounting staff to appropriate disciplinary action in worse cases

Role of Compensating Controls in a Small Business Setup

A compensating control is an alternative control put in place to satisfy the requirements of a good internal control system when traditional controls are impossible. It exists in small businesses because it’s often impractical to follow optimal controls when there are only a few employees (fewer than 10) handling administrative and accounting functions.

This limitation makes it difficult to comply with the segregation of incompatible duties because it’s possible that one or two employees might handle several custody, authorizations, and recording functions. In small business bookkeeping, the owner might only hire one to two accounting staff to record daily transactions, reconcile customer or vendor accounts, or even handle assets.

Due to the limitation, compensating controls must be in place to solve any deficiencies. For small businesses, the best compensating control is the participation of the small business owner in the accounting process. The owner must take an active role by supervising and monitoring accounting activities, and they may delegate minor tasks to managers or supervisors to filter out issues that are material to the small business.

Bottom Line

Accounting controls are necessary, even for a small business. They help owners monitor business transactions and ensure that every transaction has been properly recorded in the books. Without controls, you risk your business losing assets or having unreliable financial information that could lead to over or underpaying taxes.