Internal Control

INTERNAL CONTROL

Internal Control refers to plan of an organization and policies and procedures that ensures an efficient conduct of the business.  E.g.  an organization has a policy of giving 10% discount, this policy restrict sales department to give more than 10% discount and direct finance department to ensure sufficient cash after discount thereby avoiding any liquidity problem. Hence it ensures efficient conduct of a business.

Internal control keeps an organization disciplined. It ensures orderly conduct of business in all functional areas. It extends beyond accounts and finance. An internal control system consists of procedure to complete a task (it can be any procedure e.g. procedure for granting loan to employees etc.) and the control environment. Control environment means attitude and actions of the management regarding its internal control system.

Control environment suggest how weak or strong is the internal control system. An auditor also analyse the control environment before planning his audit. The main reason behind Satyam’s collapse was weak control environment.

Control environment is affected by three factors namely “organizational structure”, “management supervision”, “personnel”.

The organization’s structure is the first and the foremost thing that affects the internal control system. An organization’s structure should be such that incompatible functions (such as recording and custodial functions) can be separated. This would give no room for fraud or misstatement.

Next factor affecting internal control is Management Supervision. Since Management is responsible for devising and maintaining the internal control system, it must review its internal control system periodically. For this an audit department can be established by the management.

Lastly, the Personnel. At the start itself property qualified and experience must be recruited. A proper check must be established on activities of personnel. One can use the “Internal Check” technique for this purpose.

Click here for government certification in Management