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A Clear Look at Internal Controls: Theory and Concepts

Hammed Arad (Philae)

Department of accounting, Islamic Azad University, Hamadan, Iran

Barak Jamshedy-Navid

Faculty Member of Islamic Azad University, Kerman-shah, Iran

Abstract

:

internal

control

is

an

accounting

procedure

or

system

designed

to

promote

efficiency

or

assure

the

implementation

of

a

policy

or

safeguard

assets

or

avoid fraud and error.

Internal Control is a major part of managing an organization.

It

comprises

the

plans,

methods,

and

procedures

used

to

meet

missions,

goals,

and

objectives and, in doing so, support performance-based management. Internal Control

which

is

equal

with

management

control

helps

managers

achieve

desired

results

through

effective

stewardship

of

resources.

Internal

controls

should

reduce

the

risks

associated

with

undetected

errors

or

irregularities,

but

designing

and

establishing

effective

internal

controls

is

not

a

simple

task

and

cannot be accomplished through a short

set

of

quick

fixes.

In this paper the

concepts of internal controls and different aspects of internal controls are discussed.

Keywords

:

Internal Control, management controls, Control Environment, Control

Activities, Monitoring

1. Introduction

The

necessity

of

control

in

new

variable

business

environment

is

not

latent

for

any

person

and

management

as

a

response

factor

for

stockholders

and

another

should

implement

a

great

control

over

his/her

organization.

Control is the activity of managing or exerting control over something. he emergence

and development of systematic thoughts in recent decade required a new attention to

business resource and control over this wealth. One of the hot topic a bout controls

over business resource is analyzing the cost-benefit of each control.

Internal

Controls

serve

as

the

first

line

of

defense

in

safeguarding

assets

and

preventing

and

detecting

errors

and

fraud.

We

can

say

Internal

control

is

a

whole

system

of

controls

financial

and

otherwise, established by

the management

for

the smooth

running of business;

it includes internal cheek, internal audit and other forms of controls.

COSO

describe

Internal

Control

as

follow.

Internal

controls

are

the

methods

employed

to

help

ensure

the

achievement

of

an

objective.

In

accounting

and

organizational

theory,

Internal

control

is

defined

as

a

process

effected

by

an

organization's

structure,

work

and

authority

flows,

people

and

management

information

systems,

designed

to

help

the

organization

accomplish

specific goals or objectives.

It is a means by which an organization's resources are

directed,

monitored,

and

measured.

It

plays

an

important

role

in

preventing

and

detecting

fraud

and

protecting

the

organization's

resources,

both

physical

(e.g., machinery and property) and intangible (e.g., reputation or intellectual property

such

as

trademarks).

At

the

organizational

level,

internal

control

objectives

relate

to

the

reliability

of

financial

reporting,

timely

feedback

on

the

achievement

of

operational

or

strategic

goals,

and

compliance

with laws and regulations. At the specific transaction level, internal

control

refers

to

the

actions

taken

to

achieve

a

specific

objective

(e.g.,

how

to

ensure

the

organization's

payments

to

third

parties

are

for

valid

services

rendered.)

Internal

control

procedures

reduce

process

variation,

leading

to

more

predictable

outcomes.

Internal

controls

within

business

entities are called also business controls. They are tools used by manager's everyday.

office

to

discourage

theft,

and

reviewing

your

monthly

statement

of

account

to

verify

transactions

are

common

internal

controls

employed

to

achieve

specific objectives.

All

managers

use

internal

controls

to

help

assure

that

their

units

operate

according

to

plan,

and

the

methods

they

use--policies,

procedures,

organizational

design,

and

physical

barriers-constitute.

Internal

control is a combination of the following

：

1. Financial controls, and

2. Other controls

According

to

the

institute

of

chartered

accountants

of

India

internal

control is the plan of organization and all the methods and procedures adopted

by

the

management

of

an

entity

to

assist

in

achieving

management

objective

of

ensuring

as

far

as

possible

the

orderly

and

efficient

conduct

of

its

business

including adherence

to management policies, the safe guarding of assets

prevention and detection of frauds and error

the accuracy and completeness of

the

accounting

records

and

timely

preparation

of

reliable

financial

information,

the

system

of

internal

control

extends

beyond

those

matters

which

relate

to

the function of accounting system. In other words internal control system

of

controls

lay

down

by

the

management

for

the

smooth

running

of

the

business

for

the accomplishment of

its objects.

These controls can be divided

in two parts i.e. financial control and other controls.

Financial controls:

- Controls for recording accounting transactions properly.

- Controls for proper safe guarding company assets like cash stock bank debtor

etc

- Early detection and prevention of errors and frauds.

- Properly and timely preparation of financial records I e balance sheet and profit

and loss account.

- To maximize profit and minimize cost.

Other controls:

Other controls include the following:

Quality controls.

Control over raw materials.

Control over finished products.

Marketing control, etc

6. Parties responsible for and affected by internal control

While

all

of

an

organization's

people

are

an

integral

part

of

internal

control,

certain

parties

merit

special

mention.

These

include

management,

the

board

of

directors (including the audit commit tee), internal auditors, and external auditors.

The

primary

responsibility

for

the

development

and

maintenance

of

internal

control rests with an organization's management.

With increased significance placed

on

the

control

environment,

the

focus

of

internal

control

has

changed

from

policies

and

procedures

to

an

overriding

philosophy

and

operating

style

within

the

organization.

Emphasis

on

these

intangible

aspects

highlights

the

importance

of

top

management's

involvement

in

the

internal

control

system.

If

internal

control

is

not

a

priority

for

management,

then

it

will

not

be

one

for

people

within

the

organization

either.

As an indication of management's responsibility, top management at a publicly

owned organization will

include

in the organization's annual financial

report

to

the

shareholders

a

statement

indicating

that

management

has

established

a

system

of

internal

control

that

management

believes

is

effective.

The

statement

may

also

provide

specific

details

about

the

organization's

internal

control system.

Internal

control

must

be

evaluated

in

order

to

provide

management

with

some

assurance

regarding

its

effectiveness.

Internal

control

evaluation

involves

everything

management

does

to

control

the

organization

in

the

effort

to

achieve

its

objectives. Internal control would

be judged

as

effective

if

its

components

are

present

and

function

effectively

for

operations,

financial