Management & Internal Control System

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Do you want to mitigate the following problems?

These problems may arise in your organisation mainly due to:

The above may result in the lack of ability to track performance against budgets, forecasts and schedules. Additionally, lack of attention to information security leads to privacy concerns. Unauthorized access to financial data and customer records, including sensitive information, results in security breaches and compromised accounts. Illegal transactions include theft or misappropriation of assets by employees, which may include falsification of records. Employees may also take bribes to conceal theft.

An Internal Control System can mitigate all these issues.

By instituting a comprehensive set of policies and procedures, a company can mitigate the problems associated with past lack of internal control. Making each employee accountable for ethical behaviour, high standards for business conduct and adherence to laws ensures that transactions occur in a reliable way. Ensuring that only trained, trustworthy, knowledgeable and competent personnel perform tasks prevents errors, irregularities and fraud. Internal control systems must be monitored and maintained. Independent audits ensure compliance with internal and government regulations.
It is to be kept in mind, a business organization, be it 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.

How can you avail this service?

Our ThinkWrite Team will help you in implementation, regular monitoring and reporting of the Internal Control System. It will surely help your business grow smoothly.

1. How is Internal Control System useful to your business?

An internal control system, not only prevent fraud forgery but also fulfils other objects:

2. Internal Control System

Internal controls system includes a set of rules, policies, and procedures an organization implements to provide direction, increase efficiency and strengthen adherence to policies. Three elements of the internal control system are:

I. Environment control:The attitude, alertness, and work-zeal of directors, managers and shareholders are reflected through environmental control.

II. Accounting system :Accounting system means some procedures and recordings with which identification of business transactions, classification, summarization, statement preparation and analysis for timely presentation of correct information are performed.

III. Control procedure:The additional policies and procedures adopted by the business authority for ensuring the achievement of the specific goal of a business organization are the controlling procedures.

3. Control Procedures

These control procedures are:

In short, it can be briefly stated that the overall policies and plans adopted by your management for the proper execution of business activities are called the internal control system.

4. Components of Internal Control System

I. 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.

II. 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.

III. 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.

IV. 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.

V. 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.

5. Business’ 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 behaviour 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.

6. Objectives of Internal Control System

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 fulfil the following targets:

A. 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 the manager can immediately identify the person concerned and holds him liable. Lost documents can easily be detected if the task of maintaining records is assigned to a particular employee and it becomes possible to know the recording process of transactions. An employee assigned with a particular job can easily provide necessary information regarding that job. Moreover, an employee feels proud if he is assigned a particular job and tries to complete the job using die best of his skill.

3. Rotating job assignments of the employees: Some organizations rotate job assignments of employees at intervals to avoid fraud-forgery by the employees concerned. Under this policy, the employee concerned can easily understand that on the placement of somebody else in his place his dishonesty if it is done, will be detected. This ensures the honesty of an employee.

4. Using mechanical devices: Business concerns adopt various mechanical devices to avoid stealing, destruction, and wastage of assets. Under the mechanical system, cash register, cheque-protectors, time-clock, mechanical-counters, etc. are used as control methods. Since a cash-register contains locking-tape, each cash sale is recorded here. The amount of cheque is written on the cheque by the cheque-protector machine to avoid any sort of alteration. Arrival and departure of employees are recorded properly with the help of time- clock.

B. Compliance with organization policies and laws of the country

Internal control becomes effective only when compliance with organization policies and laws of the country is ensured.
To make an internal control system effective and ensured, efficient and trustworthy employees are required to be appointed.
Effective starting of the internal control system depends on time and labor spent on the recruitment of employees.
There should be a training program for the newly appointed employees and policies of the business concerns are to be communicated to them properly.

For example:

Every cash disbursement must have prior approval of the higher authority.
Daily written job specification makes employees responsible for their irresponsible duties. ‘Employees duties and execution of policies are to be well-defined to them during the primary training period.
In the case of the joint-stock company internal control system is to be framed complying with the law of the country.

C. Evaluation of performance

The proper controlling system should have provisions for supervision and evaluation of assigned duties of the employees. The absence of evaluation and supervision system hampers the objectives of a business organization to a great extent. Many business organizations engage internal auditors to evaluate and supervise the work of the employees. The functions of internal auditors are to evaluate and supervise the extent of policies and methods of the organization followed by the employees.

D. The accuracy of accounting records

A business organization should maintain a complete and correct accounting record. For ensuring proper maintenance of accounts efficient and honest personnel are to be appointed and trained. The performance of the employees is evaluated at intervals. By the supervisors to ensure that the policies of the business are followed by the employees. An inaccurate or incomplete accounting record prompts the dishonest employees to steal because they can easily subside the act of stealing. Transactions accounted for are the documentary evidence of business. This documentary evidence is an integral part of internal control systems. These documents are to be arranged serially for convenient control. Since these primary documents are the documentary evidence of transactions of a business, the validity of these documents is to be checked from time to time. For example, the documents used for recording transactions of accounts are examined for the re-audit purpose of the merchandise inventory of a business organization.

While maintaining accounts of transactions the accountant is. to preserve the following four documents:

a) Purchase requisition:Written order placed by the officers of the department concerned to the purchasing department for purchasing a certain quantity of goods is called purchase requisition.

b) Purchase order: Before purchase, the buyer sends a written order to the seller requesting him to send particular goods. This written order is called a purchase order.

c) Invoice/Chalan: The seller sends an invoice with the sold goods to the buyer wherein the descriptions, quantity, rates of the goods are mentioned.

d) Receiving report: It is a purchase document prepared by an officer of the purchasing department. It is treated as documentary evidence of the goods received.

Steps:

Requisition department sends a purchase requisition to the purchasing department
The purchasing department sends a purchase order to the supplier, with copies going to the receiving department and accounting department.
The supplier sends goods to the receiving department, where goods received are checked against the purchase order and send an invoice to the accounting department.
The receiving department sends goods to the requesting department and sends receiving a report to the accounting department.
Accounting department checks to receive reports against the purchase order and invoice and sends a cheque for payment of invoice to the supplier.

The price of purchased goods is paid on the basis of these four documents and these are compared with accounting records. A business concern fails to make payment of a legitimate invoice without these documents or it might have to make payment of the fictitious invoice or more than one invoice. A business concern effectively completes its internal control system comparing sources and documents with accounting records of those transactions. It is unfortunate that a business concern adopting its internal control system cannot avoid theft altogether. A dishonest employee always tries to misappropriate no matter whatever effective control systems exist as in a business concern. Therefore, a business concern has to make an arrangement of casualty insurance on its assets. Under this system loss of non-cash assets is reimbursed. Besides, A business concern may arrange fidelity bonds between employees handling cash and other negotiable instruments. Under this system, a business concern will get reimbursement of money lost or theft. Under these two systems i.e., casualty insurance on assets and fidelity bonds on employees, a business concern can recover at least a portion of any loss caused due to stealing, misappropriation, etc.