Every company must have risks errors and fraud in various operational aspects. Actions such as embezzlement of cash or falsification of documents can have serious repercussions for the continuity of the business.
Internal control serves as a preventive measure to minimize such risks.
This article will discuss the definition as well as the components of implementing internal controls. Check out the full review!
Understanding Internal Control
In the following we present what the internal control system is in the opinion of some experts in full.
- According To Horngren (2009)internal control encompasses all plans and actions taken within an organization to protect assets, ensure employees comply with company policies, maintain the accuracy of accounting records, and improve efficiency in operational processes.
- Hery (2016) explain that internal control consists of a collection of policies and procedures designed to protect company assets from misuse, ensure the accuracy of accounting information, and ensure that all regulations, laws, and management policies are complied with by all employees.
- Dasaratha V. Rama dan Frederick L. Jones (2008 film states that internal control is a process that is influenced by the board of Directors, management, and other staff within the company. This process aims to ensure the achievement of several objectives, including operational effectiveness and efficiency, accuracy of financial statements, and compliance with applicable regulations.
From this information, it can be concluded that internal control is a set of policies designed to ensure that the company's operational processes run in accordance with established rules and regulations.
The policy will be standardized into a system in the company known as the internal control system. This system takes the form of a structured framework.
Purpose Of Internal Control
This system is applied for several purposes, including:
- Protect the assets and financial resources of the company.
- Prevent losses in business that affect the reputation of the company.
- Ensure all activities of the company in accordance with the provisions.
- Candidate must possess at least a bachelor's degree, any field.
- Improve the effectiveness and efficiency of the company's operations.
- Obtain the accuracy of reports and financial information.
- Cultivate a corporate culture that early detects weaknesses.
- Provide assurance to stakeholders that the company can be trusted.
Types of Internal Control
A. Based On The Benefits
This policy is categorized into 3 based on its benefits, namely preventive, corrective, and Detective.
1. Preventive Control
Preventive controls are designed to prevent errors or risks before they occur. This type of Control focuses on trying to minimize the possibility of risks appearing by controlling the activities carried out. Examples of preventive internal controls include:
- Automatic application control to prevent incorrect data input or unauthorized activities.
- Access restrictions where only certain people are authorized to access sensitive data or systems.
- Validation procedures to ensure that a transaction or process is verified before proceeding.
2. Corrective Control
Corrective control is used after an error or problem occurs. This type of Control aims to correct inappropriate or undesirable situations, so that the effects of errors are minimized. Corrective control usually involves:
- Change or correct incorrect data after an error is found.
- Take action to restore compromised systems or data.
- Provide training for employees after errors are found in the performance of duties.
3. Detective Control
Detective Control aims to detect errors or problems after the occurrence of a process. These controls do not prevent errors, but help identify problems so that further action can be taken before they become larger. Examples of Detective control include:
- Audit to periodically check financial statements or systems to detect irregularities.
- Activity Monitoring to oversee transactions or activities operated to detect anomalies.
- Recheck documents and transactions to make sure there are no errors.
B. By Purpose
Internal control by its purpose is divided into accounting and administrative internal control.
1. Internal Control Accounting
Accounting internal control focuses on the management and control of a company's financial data. Its purpose is to ensure that all transactions and financial information generated are reliable, accurate and well protected.
This process includes a variety of steps, from data verification to separation of duties, to prevent errors and fraud that can harm the company. When the integrity of financial statements is maintained, the company can minimize the risk of financial and reputational losses.
2. Internal Control Administration
Administrative internal control is concerned with the efficiency and effectiveness of administrative management in an organization. This control ensures that administrative processes run optimally to support business objectives
In addition, administrative internal control also includes regular monitoring and evaluation of existing procedures and policies, so that any potential obstacles can be identified and overcome quickly.
C. Based On The Coverage
Internal control by Scope is divided into general and application categories.
1. General Control
This control includes all activities related to data management in the computer system. The main goal is to ensure that data is managed securely and regularly. Managed elements include separation of responsibilities and data processing.
2. Application Control
This control focuses on monitoring transactions and application usage. The main elements include transaction recording, authorization, and reporting on the application. This control aims to ensure the accuracy and security of every transaction that occurs through the application.
Internal Control Components
After knowing the meaning, objectives and types of internal control, let's study the components to exercise internal control.
1. Designing Control Procedures
Control procedures are measures designed to ensure internal control goes as planned. The goal is to prevent fraud and errors in the company's activities so that the company's operations run safely and under control.
2. Conduct Surveillance
Supervision serves to ensure compliance with the rules of internal control. It also helps identify problems that require remedial action. Supervision can be done through several ways such as conducting internal audits and identifying warning signals from the company's operational processes.
3. Assessing The Risks Of Business Activity
Every business activity has risks that need to be identified and managed. The management of the company must carry out analyzes, evaluations and actions to reduce risks that may interfere with the achievement of the company's objectives. Such risks can include legal changes, internal fraud, competitor threats, and economic or political situations.
4. Creating A Control Environment
The control environment is the foundation that includes the values, structures and rules of the company that shape the culture of discipline and compliance. Factors affecting the control environment include integrity and code of conduct, organizational structure, and administrative practices.
5. Maintain information and communication processes
Information and communication is the key to ensuring that all components of control internal running effective. It supports policy formation, risk assessment, and oversight. Management makes use of external information for proper decision making.
Conclusion
Internal control aims to protect the company's assets, ensure compliance with regulations, as well as improve operational efficiency.
Through various types and components of control, companies can minimize the risk of errors, fraud, and inaccuracies in information.
If you want to implement effective internal controls, protect your company's assets by Audithink's Comprehensive Features. As an internal audit software that has been trusted in various industries, Audithink helps manage the audit process efficiently and accurately.
Contact us now for demo for free!
