The growth in the business world has resulted in new regulations coming into force. Audits have become necessary in business long ago. Accounting and finance has become a lucrative career option. For that, a CMA certification has garnered immense attention.
As time has progressed, there has been a constant improvement in implying new regulations for businesses to follow. One such example is internal controls. Internal controls have become an integral part of any organisation trying to make progress with transparency. Here, we will discuss various aspects of internal controls.
What is Internal Control?
Internal control is a process that ensures that a company or organisation is compliant with all financial regulations. You can think of internal controls as a measure to monitor other aspects of the company to ensure it does not suffer from any mishaps.
These controls ensure that the organisation is meeting its goals while preventing errors, fraud and mismanagement. Internal controls are very effective in monitoring smoother operations for the organisation.
In most cases, the managerial postholders are responsible for monitoring internal controls and creating an appropriate audit trail. External auditors will check the organisation’s financial reports, as well as the internal controls, to make sure everything is in order.
What are the Components of Internal Control?
When implementing an internal control system, an organisation should keep a few components in the system so it becomes entirely functional.
It is the basis of all other components of the internal control. It creates a consciousness about the control system in the organisation. It is the management that designs the control environment.
The employees must adhere to the regulations and reveal improper activities, such as fraud.
Information and Communication System
Information and communication systems play a very crucial part in internal controls. With a fluent system, it can create an opacity about the roles and duties of each employee. In addition, if the employees can understand the steps they require to exercise, it can help them perform better.
It deals with analysing the potential risks or losses in achieving the goals. Next comes the management of such risks. Organisations can then focus on measures to mitigate the risk factors and keep the loss at a minimum while achieving a particular goal.
These procedures and regulations ensure that the internal control system is operating at its capacity. These focus on maintaining the integrity of the system while also ensuring compliance. Preventive and detective activities are part of these.
Monitoring how internal controls are working over a given period is crucial. It can help identify any ongoing issues in the system that can cause any disruption. In some cases, there might be a requirement for updating the regulations or training the employees for the system to function better.
Advantages and Disadvantages of Internal Controls
Although internal controls provide an organisation with several benefits, it is not devoid of negatives. Here are the pros and cons of internal controls.
The advantages of internal controls are:
Internal controls provide clear guidelines to all employees regarding their duties and responsibilities. The employees will know which procedures they are required to follow.
Internal controls can massively improve an organisation's operational efficiency. It prevents the organisation from following any unnecessary steps in its day-to-day operations. These help in improving the financial activities of the company. Internal controls play a crucial role in preventing fraud.
Generating financial statements is a part of the responsibilities of internal control. It aids the organisation’s hierarchy in making business decisions that matter.
Internal controls can enhance the accountability of the organisation significantly. It ensures the identification of every error and subsequent improvement to ensure the non-occurrence of similar mistakes.
With internal controls, you can reduce the cost of external audits. A clearly enforced internal control means you can reduce the requirement for revisions and avoid starting the entire internal controls up from scratch after an audit.
There are some disadvantages of internal controls. These are:
Often, there are deficiencies in the organisational structure that make internal controls ineffective. Also, sometimes, the members in the higher level of management may interfere with internal controls.
If the organisation is too small, it may not be able to implement every aspect of internal control.
Human errors are a common issue that can cause internal control to fail. Also, keep in mind that not all human errors are unintentional.
Updating the internal control system with the latest technology and measures is crucial. Failing to do so may result in a failed internal control system.
Internal control measures are usually costly. They take a long time and quite some resources to implement.
Types of Internal Controls
There are two types of internal controls. These are:
Preventive controls are measures in internal control to prevent any errors or frauds from taking place. You can think of them as vaccines to prevent a disease from happening. Preventive controls include
Requirement of approval and
Limiting access to assets like inventory and cash
Detective controls come into use when an organisation suffers from any mishap. It is comparable to the use of medicines when a person gets sick. Detective controls include
External and internal audits
Role of Internal Controls in Audit and Advisory
Although the management of an organisation implements internal controls, it is of great interest to the auditor. An auditor can rely on efficient internal control to make their work easy.
However, depending too much on internal control can often create a problem for the editor.
Internal control systems can benefit both the organisation and the auditors. It can prevent any mishaps from happening. If you are interested in accounting and finance, the Certified Management Accountant programme by Imarticus is a great option to hone your skills. The US CMA course is recognised around the world and helps in mastering the 12 core skills required in accounting and finance.