INTERNAL CONTROL SYSTEMS NOTES
What is Internal Control System? The internal control structure of a company consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Objectives of Internal Control System To ensure that the business transactions take place as per the general and specific authorization of the To make sure that there is a sequential and systematic recording of every transaction, with the accurate amount in their respective account and in the accounting period in which they take place. It confirms that the financial statement fulfils the relevant statutory To provide security to the company’s assets from unauthorized use. For this purpose, physical security systems are used to provide protection such as security guards, anti-theft devices, surveillance cameras, To compare the assets in the record with that of the existing ones at regular intervals and report to the those charged with governance (TCWG), in case any difference is To evaluate the system of accounting for complete authorization of the To review the working of the organization and the loopholes in the operations and take necessary steps for its To ensure there is the optimum utilization of the firm’s resources, e. men, material, machine and money. To find out whether the financial statements are in alignment with the accounting concepts and principles. An ideal internal control system of an organization is one that ensures best possible utilization of the resources, and that too for the intended use and helps to mitigate the risk involved in it concerning the wastage of organization’s funds and other resources. Preventive Controls: These controls are introduced in the firm to stop errors and irregularities from taking Detective Controls: These controls are implemented to reveal errors and irregularities, once they take Corrective Controls: These controls are designed to take corrective action for removing errors and irregularities after they are The type of internal control system implemented in the organization will be based on the company’s nature and requirements. Internal Control System is important for every organization, for efficient management as well as it also assist in the company’s audit. It includes all the processes and methods to help the company in reaching its ultimate objective. Components of Internal Control System 1. Controlling the environment The control environment is the basis of other elements of all other components of the internal control system. Moral values, managerial skills, the honesty of employees and managerial direction, etc. are included in the controlling environment. 2. Risk assessment After setting up the objective of business, external and internal risks are to be assessed. The management determines risk controlling means after examining the risks related to every objective. 3. Control activities The management establishes a controlling activities system to prevent risk associated with every objective. These controlling activities include all those measures that are to be followed by the employees. 4. Information and communication Relevant information for taking decision are to be collected and reported in proper time. The events that yield data may originate from internal or external sources. Communication is very important for achieving management goals. The employees are to realize what is expected of them and how their responsibilities are related to the activities of others. Communication of the owners with outside parties’ like’s suppliers is also very important. 5. Monitoring When the internal control system is in practice, the organization monitors its effectiveness so that necessary changes can be brought if any serious problem arises. Responsibility for Internal Control System It is the general responsibility of all employees, officers, management of a company to follow the internal control system. The under-mentioned three parties have definite roles to make internal control system effective: 1. Management Establishment and maintenance of an effective internal control structure mainly depends on the management. Through leadership and example or meeting, the management demonstrates ethical behavior and integrity of character within the business. 2. Board of directors The board of directors possessing a sound working knowledge gives directives to the management so that dishonest managers cannot ignore some control procedures. The board of directors stops this sort of unfair activity. Sometimes the efficient board of directors having access to the internal audit system can discover such fraud and forgery. 3. Auditors The auditors evaluate the effectiveness of the internal control structure of a business organization and determine whether the business policies and activities are followed properly. The communication network helps an effective internal control structure in execution. And all officers and employees are part of this communication network. Characteristics of a Proper Internal Control System An effective internal control system includes organizational planning of a business and adopts all work-system and process to fulfill the following targets: Safeguarding business assets from stealing and Ensuring compliance with business policies and the law of the Evaluating functions of each employee and officer to increase efficiency in Ensuring true and reliable operating data and financial It is to be kept in mind, a business organization, be its small or large, can enjoy the benefits of adopting an internal control system. Prevention of stealing-plundering and wastage of assets is a part of the internal control system. Protection of assets A business organization protects its assets in the following ways: 1. Segregating the duties of the employees Segregation of the duties of the employees means that each employee is assigned with specific tasks. The person in charge of assets is not allowed to maintain accounts of the assets. Some other person maintains the accounts of these assets. Since different employees perform the same nature of transactions, the work of each is automatically checked. Segregation of the duties of the employees of an organization reduces the possibility of stealing assets and if stolen, detection becomes easier. For example, there is no scope for stealing cash by a cash-receiving employee where cash receipts accounts are maintained by a different employee. 2. Assigning specific duties to each employee The employee assigned with a specific duty is held responsible for his assigned activities. If and when any problem arises
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