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Promote operational efficiency
WHAT YOU NEED TO KNOW
Establishing effective controls minimizes waste, which lowers costs and increases profits is a statement referring to promoting operational efficiency.
The five objectives of internal control are:
1. Safeguard assets. A company must safeguard its assets against waste, inefficiency, and fraud. As in the case of Green Valley Coffee Company, if management fails to safeguard assets such as cash or inventory, those assets will slip away.
2. Encourage employees to follow company policies. Everyone in an organization—managers and employees—needs to work toward the same goals. A proper system of controls provides clear policies that result in fair treatment of both customers and employees.
3. Promote operational efficiency. Companies cannot afford to waste resources. They work hard to make a sale, and they don't want to waste any of the benefits. Effective controls minimize waste, which lowers costs and increases profits.
4. Ensure accurate, reliable accounting records. Accurate records are essential. Without proper controls, records may be unreliable, making it impossible to tell which part of the business is profitable and which part needs improvement. A business could be losing money on every product it sells—unless it keeps accurate records for the cost of its products.
5. Comply with legal requirements. Companies, like people, are subject to laws, such as those of regulatory agencies like the Securities and Exchange Commission (SEC); the IRS; and state, local, and international governing bodies. When companies disobey the law, they are subject to fines, or in extreme cases, their top executives may even go to prison. Effective internal controls help ensure compliance with the law and avoidance of legal difficulties.
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