Internal Control System

To achieve the above-mentioned objectives, it is necessary to coordinate accounting systems and internal control systems, since a double entry system, which lies in the heart of any accounting system, defines the procedure for registration business operations and provides adequate control. Krishnan (2005) stated that “The emphasis on good internal control of course arises because it is considered to be an important factor in achieving good quality financial reporting” (p. 650).

This is a widespread fact that there are some limitations to internal control systems and procedures that are implemented by the organizations. Let us focus our attention on three main limitations.

The first limitation is the lack of training and communication skills. This is a proven fact that the workers who do not understand the main purposes of the internal control system can violate the internal control’s effectiveness.

The second limitation is collusion. The internal control system can be overreached with the help of employee collusion. The workers can use the data for their personal goals, when two or more subordinates work with the same information concerning financial operations.

The last one is the lack of management support. The managers, who have an ineffective support for their new internal control systems, report about this situation to the workers. In turn, staff limits their own personal support of this control system.

Moreover, there are symptoms of a lack of internal control. It can be happened for a variety of different reasons. The company’s losses occur as a result of infringement. In addition, fines are levied on the companies, when management does not pay specific attention to their employees and does not control their actions. A lack of internal control can lead to employee fraud.

Talking about internal control procedures, it is possible to say that control procedures are important components of the internal control system. Enterprises with a large number of employees should have the procedures that encourage employees to act in accordance with the objectives of the managers or owners of these enterprises. In addition, these procedures sharply reduce the opportunities for the commission and / or concealment of fraud. The degree of complexity and especially the activities of the enterprise, as well as the specifics of the control environment and accounting system affect the composition of control procedures.

The internal control procedures, which close access for the potential fraudsters, and deprive them of opportunities to hide traces of their crimes, are as follows:

  1. Separation of duties;

    Any kind of activity has always been better controlled with the help of separation of duties among employees or by double-checking. These forms of control, like the majority of preventive measures, are often used in applications where calculations are made in cash.
  2. Verification system authority;

    The control procedures, undertaking on the basis of verification system authority, have a lot of varieties, two of which are a special password system that gives an opportunity for those or other people to use computers and gain access to certain databases, and a special card with a handwritten signature, allowing people to enter facilities with the bank safes, cash checks and perform other operations in financial institutions.
  3. Inventory.

    The main way of physical control over the preservation of the property is inventory.

    The main objectives of inventory are:

    • Identification of the actual availability of the property;

    • Comparison of the actual availability of the property with accounting data;

    • Monitoring of the recording commitment’s completeness.

The effectiveness of internal control requires a proper distribution of duties between those who carry out accounting procedures and controls, and those who work with assets. Though the separation of duties is relevant to all three elements of the internal control system (control environment, accounting system, procedures and controls), it is especially important for the functioning of the third element – control procedures. The separation of the duties also includes the issuance of permits to various persons in the conduct of any particular class of business operations, implementation of control procedures during data processing, monitoring of such procedures, and drafting of relevant accounting documents and work with the assets.

One of the key documents in any business is accounting policies. This is a well-known fact that the correct accounting policies depend on the financial condition of any organization. Accounting policies affect the level of paid taxes and charges on the cost, the financial results and profitability of business.

A proper construction of your company’s policy allows you to optimally allocate the company resources and use them as efficiently as possible. The absence of a corporate accounting policy increases some risk of unplanned expenses and losses, which ultimately hinders the development of business.

Thus, it is possible to say that that the impact of the missing journal entry on the financial statements of the company depends on accounts and the journal entry. For instance, if it was a reclassification from one account to another one, it would not have any impact on the journal entry. But if it affected two nonequivalent and different accounts: an expense account or an asset one you could be mistaken in the profit and loss statement or in the balance sheet.

Taking the above-stated information into account, it is possible to conclude that in a broad sense, internal control can be viewed as a system consisting of the input elements (information security control), output elements and sets of the following related links: responsibility centers, engineering controls (i.e. Information and Computer Science and Technology), control procedures, control environment, and accounting system.

 

References:

Krishnan, J. (2005). Audit Committee Quality and Internal Control: An Empirical Analysis. The Accounting Review, 80 (2), 649-675.

Pae, S., & Yoo, Seung-Weon. (2001). Strategic Interaction in Auditing: An Analysis of Auditors’ Legal Liability, Internal Control System Quality, and Audit Effort. The Accounting Review, 76 (3), 333-356.

The Committee of Sponsoring Organizations of the Treadway Commission. (n.d.). Internal Control – Integrated Framework. Coso.org. Retrieved May 12, 2011, from http://coso.org/IC-IntegratedFramework-summary.htm