Concept of Internal Controls in Accounting

What are Internal Controls?

In a broad sense, internal control comprises controls which embrace the organizational plan and the methods used to protection the assets, create the dependability of financial data and records, endorse working efficacy and loyalty to managerial policies.

Internal control is categorized by independence between departments and lines of vicarious duty and authority. It is important that these internal controls verify the dependability and correctness of the data supportive all transactions using control total techniques, sanctions and approvals, contrasts, and other tests of data accuracy.

Why Internal Controls are Important?

Before management can make judgments to maximize the long run profit of a firm, it must first have dependable accounting data on which to base these decisions. This info should be timely, accurate, complete, and reliable.

The protection of the assets of the firm against losses from misappropriation, robbery, failure to take discounts, inadequacy, and unjustified delays of credit are some functions of internal control that should be sufficiently interweaved in any good accounting system. These controls are necessary to assure management that the agreed procedures and orders are obeyed to since the management of large companies are not usually involved in personal supervision of their employees. Therefore, controls add reliability to accounting and financial data.

Internal controls are important to deliver appropriate segregation of functional responsibilities and to create a system of authorization and sanction to provide reasonable safety over these assets, liabilities, revenues, and expenses. Sound practices shadowed in the performance of duties with in the organization and the allocations of persons of a quality appropriate with responsibilities are two additional necessary and correct functions of internal controls in any system.

Internal Control Over Financial Reporting

The internal control system of an entity is severely interconnected to the structure used by management to supervise the activities of the organization, or to what is defined as the entity’s corporate governance. Good corporate governance should deliver proper inducements for the board and management to follow purposes that are in the interest of the company and shareholders and should ease effective monitoring, thereby encouraged firms to use resources more proficiently. The Board of Directors is thus accountable for providing governance, supervision and oversight for senior management and guaranteeing that a suitable internal control system is in place and effective, meaning it ensure that foreseeable objectives are attained.

Financial reporting is the connection between the company and its external environment. One of the main features which contributed to these failures relate to the internal control system established around the disclosure of information to stakeholders. It seemed that not attaining the objective of effective internal control system over financial reporting demoralizes the status of a company, even at the attendance of many other control components, making it problematic or impossible for a company to be dependable on the market, to be able to collect financing resources, to be believable to shareholders and stakeholders in general.

Leave a Reply

Your email address will not be published. Required fields are marked *