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What is Internal Control?

Internal Control

What is Internal Control?

Internal control offers guidance, practices and measures that the accounting system needs to operate within an enterprise. Internal control are intended to defend against fraud and abuse, guarantee accurateness and appropriateness of information, and ensure that an organization is in conformity with regulatory guidelines. Internal accounting controls are a sequence of procedures and practices intended to promote both financial and general management practices.

Significance of Internal Control

Internal control can be further outlined as being planned to insure the following within an enterprise:

  • Financial information is dependable and that managers and related boards have the assurance that financial data is precise
  • Company assets and records (information) are protected from fraud
  • Policies are pursued by employees, stakeholders.
  • All applicable regulations are carried out by the organization.

Important of Internal Control

The following are some of the major reasons for having strong internal controls:

Provides a Control Environment

This refers to the general outlook of management or others who manage the internal control of an organization. A high level of commitment to moral values and good business practices should be exhibited at the executive, management and board level to instill employees with a comparable attitude to implementing effective controls. The internal control environment may be inclusive of background checks for important employees, technical competence of staff and by means of written procedures to support the controls.

Enables Risk Assessment

Internal Control helps in the identification of areas of potential risk in an organization and answers the following questions:

  • What assets are considered at risk?
  • What can seemingly go wrong?
  • Who is prone to be at risk?

The role of the internal control personnel is to:

  • identify methods to control risk and
  • analyze associated costs.

Facilitates Control Activities

Control activities refer to activities that help provide a reasonable level of assurance associated with the goals and objectives of the organization or enterprise will be achieved. Absolute assurance is impossible since there are a number of factors inclusive of: Prohibition costs, human error and the capability of management to override controls.

Provides Information and Communication Systems

Communication lets employees know what is expected of them and how to achieve given objectives. Clear communication and information systems as permitted by internal control also identify who has responsibility for a specified task and provides needed intelligibility for employees. Information systems are inclusive of data repositories and the reports that monitor the progress in relation to operational, financial and compliance goals. Information offers a means to examine progress toward definite accomplishments and provides administration with the information to make decisions.

Permits Monitoring

This step involves examination of the internal control systems and making certain that it operates as expected. The aim of monitoring should always be on areas of most risk. It is the responsibility of company to change internal controls to reveal any changes in operational circumstances as they occur.

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