INTERNAL CONTROL – Introduction of Internal control, Meaning of Internal control, Definition of Internal control, Objectives of Internal control


Introduction of Internal control

Internal control is the overall control environment established by management of an enterprise for effective and efficient monitoring and control of its operations. It aims at adherence to management policies, safeguarding of assets of the enterprise, proper accounting and record of the business transactions. Internal check and internal control are vital components of the control system. The auditor should properly understand and assess the internal control system to determine the degree of reliance to be placed on it and accordingly to plan the nature, timing and extent of audit procedures to be performed by him. If the internal control is found to be effective, the auditor may resort to selective verification. However, when internal control system is weak auditor has to verify the transactions in detail.

Meaning of Internal control

Internal Control refers to the process of control exercised by the management either financial or non-financial to ensure proper accounting of business transaction and reliability of records. Internal control has a wide coverage which includes checks and controls exercised to ensure efficient and effective functioning of the business organisation. In other words, it is a process implemented by the management to provide the following:

i. Proper accounting and reliability of records,

ii. Effectiveness and efficiency of business operations, and

iii. Compliance with laws and regulations. The scope of internal control system is vast. It comprises both administrative control as well as accounting control.

Definition of Internal control

Auditing Practices (SAP-6) of Institute of Chartered Accountants of India: “Internal control system refers to the whole system of controls, f inancial or otherwise, established by the management in the conduct of a business including internal check, internal audit and other forms of control.”

From various definitions, the following points emerge:

• Internal control is a system of control or practice put in place by management.

• Controls are established over financial and non-financial areas of business.

• Controls take the forms like internal audit and internal check.

Objectives of Internal Control

Each organization must have a system of internal control in place for achieving the preset goals. Other than accomplishing the desired goals and objectives of the organization, this system plays a very important role in any organization.

The main objectives of internal control are as follows:

1. Compliance:

To have compliance with law and accounting practices that is generally accepted and followed in the country. The accounting process also needs to be in compliance with these.

2. Reliance:

To increase the reliance on the internal systems, accounting practices should be followed by the organization, so that the chances of frauds are reduced.

3. Safeguarding:

To safeguard the organization’s accounts, employees and assets by formation of fool-proof policies, rules and regulations.

4. Security:

To provide security to customers, employees and property of the organization. Physical security systems like security guards, locks and anti-theft devices are used for providing protection.

5. Increased Efficiency:

To assist in human resource and performance management, and to keep proper control over business activities to achieve maximum levels of efficiency.

6. Evaluation:

To evaluate the accounting system for proper authorization of transactions.

7. Review and Correction:

To review the working of the business, locate weak points in operations and to take corrective measures for proper working.

8. Authorization:

To provide proper authority for purchase, sale, valuation, verification and possession of assets.

9. Delegation:

To provide for division of duties among the employees where all staff members work cohesively.

10. Accurate Planning:

To ensure that the auditor’s and the accountants of the organization make all the financial reports correctly and to ensure that financial planning is done accurately.

11. Resource Utilization:

To ensure that all the resources, i.e., men, material, money and machines of the organization are optimally used.

12. Safeguarding of Resources:

To protect the resources of the organization against mismanagement or fraud and to ensure that the company’s activities are in accordance with laws and regulations.

13. Setting future Corporate Goals:

An efficient system of internal control helps the organization in goal setting. However, the organization should have certain policies, rules and regulations in place to achieve the preset goals.

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