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November 29, 2019

Internal Control

Definition
Internal control is the policy and procedures that the company set in place in order to
have an efficient and effective business operation, minimize risk, and ultimately to
achieve its objective. Internal control in a company is usually set up with the intentions
of minimize the risk of error and fraud and safeguard of the assets.

Internal control can be seen by the day to day activities in the company such as:

Use password to lock into the computer

Use fingerprint clocking system to take attendance
Lock the office door at the end of the day
Verify or review the work of others
Have your work verified or reviewed by other
Any request on purchase or payment on certain expenses requires approval etc.

Objectives of Internal Control

The common objectives of internal control are to ensure efficiency and effectiveness of
the operation, reliability of financial reporting, and compliance with laws, regulations
and internal policies as described in the table below:

Objectives of Internal Control

Efficiency Efficiency means the internal control can help reduce waste and
and increase productivity in operation. This can be accomplished by
Effectiveness ensuring smooth operation and free from disrupting. On the other
of Operation hand, effectiveness means the control can help achieve the task that
is meant for each operating activity.

For example, by implementing a fingerprint clocking system in the

internal control, the company can increase its efficiency of
attendance taking process or operation by eliminating time
performing on manual headcount and entering data into
spreadsheet. It is more effective in attendance taking process as the
data is generated from the system which is less error than manually
entering data in spreadsheet.

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 Reliability of Reliability can be achieved by ensuring the accuracy and timeliness
Financial of financial reporting. Accuracy means the financial reports are
Reporting prepared and presented in a fair manner with the lack of material
misstatements. While timeliness means the financial reports are
prepared on time and relevant to the current events.

For example, each business transaction of the company is required

to be posted daily into its accounting software by a junior accountant,
but each transaction requires authorization from a senior accountant
before going into general ledger in the accounting software.

This internal control procedure helps to ensure accuracy as the

transaction doesn’t go directly into the general ledger since it
requires a senior accountant to verify and review each transaction
first. It also helps to ensure timeliness of financial reporting as
accounting software can automatically generate financial reports
such as balance sheet and income statement and each transaction
is required to be posted daily into the accounting system.

Compliance One such internal control would be the regular monitoring of the
with laws, internal practices of business to ensure that they do not breach any
regulations regulation or policy. The monitoring activities can be done by internal
and internal audit staff, risk officer or any staff with such responsibility.
policies
For example, a senior accountant at the head office might have a
responsibility to monitor the accounting practices of accountants at
the branch level to ensure they follow the applicable standards and
internal policies.

Also, clear communications and regular training are usually provided

in the company in order to ensure that staff at every level follow the
laws, regulations and internal policies.

Control Activities
Control activities are the activities that the company performs in its internal control in
order to minimize the risks that prevent the company from achieving its objective.
Control activities are performed at all levels within the company.

Control activities in the company can be preventive controls or detective controls.

Control Activities

Preventive Preventive controls are the controls that attempt to prevent or deter
Controls error or fraud from occurring. This type of internal control activities
prevent misstatements before they occur.

Documentation, authorization, segregation of duties, and security over

the assets are examples of the preventive controls.

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 Detective Detective controls are the controls that attempt to detect or identify
Controls errors or fraud. They detect misstatements after they occur.

They provide evidence of loss that has already occurred due to error or
fraud. Review, reconciliation, physical count of inventories, and
performing the audit are examples of detective controls.

In general, preventive controls are preferable to detective controls because the

possibility of being caught by a detective control might prevent someone from
committing an error or a fraud. Also, preventive controls are usually more cost-efficient
in the internal control system.

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