Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Besides complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting. Internal controls have become a key business function for every U. In their wake, the Sarbanes-Oxley Act of was enacted to protect investors from fraudulent accounting activities and improve the accuracy and reliability of corporate disclosures.
5 Components of Internal Control System
These processes are a fundamental part of good corporate governance, as their objective is to help identify and manage the risks that keep your business from growing as well as keep them in compliance with governmental rules and regulations. An internal control audit is typically conducted by a company's management team, the board of directors and other industry experts. It consists of accounting and administrative controls with the objective to prevent and detect fraud, theft, misuse and human error. The primary objective of internal control is to ensure the integrity of the company's financial information. There are different types of internal controls, and each has a specific purpose. They all aim to improve a company's efficiency and performance while mitigating risks. These include:. This includes comparing information about current performance to forecasts, budgets and previous results in order to determine company performance. Accounting also makes use of controls in order to ensure the accuracy and integrity of financial records.
Footnotes (Appendix A - Definitions):
Internal controls system includes a set of rules, policies, and procedures an organization implements to provide direction, increase efficiency and strengthen adherence to policies. These are important for achieving the business objective. The internal control structure of a company consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. In small business organizations, generally, the owner-manager controls the total activities of his business by his personal supervision and direct participation. He himself gives the appointment of employees, completes the contract with them through discussion and also keeps, constant watch over their activities. Since the signs all the cheques, he can easily have an idea of what commodities, assets, and services he is signing for. But with the expansion of business, the appointment of additional employees and officers is needed and the scope of business also widens.
Internal control is the process, effected by an entity's Board of Trustees, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:. No matter how well internal controls are designed, they can only provide reasonable assurance that objectives have been achieved. Some limitations are inherent in all internal control systems. These include:. Internal Control objectives are desired goals or conditions for a specific event cycle which, if achieved, minimize the potential that waste, loss, unauthorized use or misappropriation will occur. They are conditions which we want the system of internal control to satisfy. For a control objective to be effective, compliance with it must be measurable and observable.