Characteristics of an Effective System of Internal Control

Topics: Audit, Internal control, Auditing Pages: 5 (1580 words) Published: December 13, 2010
Characteristics of an Effective System of Internal Control 

1.) In accounting systems, certain controls are needed to ensure that employees are doing their jobs properly and ensure that the system runs properly. These checks are in the best interest of the organization. These controls come in the form of internal controls for the system. The internal controls are the checks that are placed in the system by the company's own management to prevent the intentional misrepresentation of financial data for one party’s gain at the expense of the organization. Fraud is the primary reason that internal controls are essential in safeguarding assets.

To have an effective system of internal control, five objectives must be met. The first, and most important, is the safeguard of assets. If the organization fails to secure assets such as cash or inventory, those assets will silently slip away over time. Second, the employees must be encouraged to follow company policy and work towards the company’s goals. This involves setting in place a set of clear policies that provide fair treatment for all. This leads to the third objective, which is promoting operational efficiency. When employees follow company policy, resources are utilized at maximum capacity, which minimizes waste, lowers cost, and raises profits. Fourth, the company must ensure accurate and reliable accounting records, which are essential in measuring the health of the organization. Without doing so, the company is operating in the dark. Lastly, to maintain legitimacy, the organization must comply with legal requirements. Otherwise, it would not be permitted to conduct business and would cease to exist as an entity.

There are also five different aspects involved with the implementation of internal control. It begins with creating a control environment, which starts at the owner and top management level. They should set the example for their employees on how to act ethically within the business and that controls are necessary. Secondly, there should be an accurate system of risk assessment set in place. A company must be able to identify its business risks, as well as to establish procedures for dealing with those risks to minimize their impacts on the company. Third, an accurate and reliable accounting information system should be present within operations. Accurate information is required in order to keep track of assets and to measure profits and losses. This system should be able to record transactions as they occur, journalize them in a timely manner, post them to the company books, and then report them in financial statements. Monitoring the system of controls is the fourth aspect of internal control, and is a very important component. Day-to-day activity must be scrutinized by internal auditors to prevent anomalies. In turn, the control system, along with its overseers, should also be analyzed by external auditors outside of the organization. The final aspect of internal control is the actual control procedures themselves. A primary example of control procedures is the separation of duties, which is considered the cornerstone for safeguarding assets. 
Under the separation of duties procedure, different duties are assigned to different individuals within the organization. This is done in such a way that no one person can have full control over any single transaction. This ensures that an individual cannot have full control over the creation and operating of the system. One reason for this division is having one person controlling the system can result in fraud if that person is not completely trustworthy. Division of duties sets into place a system of comparison. Any individual’s involvement in a particular transaction is checked and compared against another individual’s involvement in the same transaction. For this reason, it is considered the cornerstone for safeguarding assets; because no single individual has complete control over...
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