Internal controls are a cornerstone of effective business operations. They allow companies to confirm that each step they take is the right one, thus allowing the development and execution of more effective and efficient operations.
Proper internal controls help ensure that financial information is accurate, that products and services meet customer expectations, and that safety procedures are followed.
Ineffective internal controls can lead to waste or fraud, which can have serious consequences for a company’s reputation and bottom line.
If you do not have a system of internal control systems and do not know where to start to implement them in your business, continue reading to find out everything you need to know about these systems.
System of Internal Control
An internal control system is a set of actions, rules, policies, and methods established by companies to avoid environmental risks.
It encompasses five main components: control environment, risk assessment, management control activities, information and communication, and monitoring.
The responsibility of the internal control system is a general commitment of all. Still, its proper functioning must be operated and monitored by the management, the board of directors, and the auditors.
Sound design and implementation of an effective internal control system are critical to maintaining compliance with financial reporting and other regulatory requirements.
Frequent assessments and review are essential to ensure that the system is meeting its objectives.
What is an internal control system for?
The control system of a company is a fundamental piece that maintains the security of stable and reliable operations.
It is incorporated into a company to avoid errors and fraud and improve processes.
The control system monitors all aspects of the company, from production to finances, in order to maintain stability and reliability.
The internal control system of a company implements internal policies in compliance with the current laws of its country and maintains adequate accounts by ensuring financial statements accuracy.
This system helps ensure that the company operates within the confines of the law and that its assets are accurately accounted for.
The controls that are put in place help to ensure that the company is able to function effectively and meet all of its financial obligations.
Principles of an internal control system
Segregation of functions
Separation of duties is a governance principle that involves dividing responsibility for all transactions, as well as reporting and auditing.
The more functions are separated, the lower the possibility of fraud. The principle is often used in organizations to prevent corruption or theft.
Has two areas of analysis:
Segregation of functions related to the different roles linked to internal control. It implies the fundamental differentiation in the processes and roles in the search for the achievement of shared objectives.
Segregation of functions by levels. It entails differentiating the internal control functions according to the organizational level, for example: strategic, tactical, operational, and specific.
Access and Permits
It establishes control of access to different parts of an accounting system by means of passwords, locks, and electronic access records.
This can keep unauthorized users out of the system while providing a way to audit the system used to identify the source of errors or discrepancies.
Reliability
Using a double-entry bookkeeping system adds reliability by ensuring that the books are always balanced.
Calculating daily or weekly trial balances can provide regular feedback on the system’s status, allowing discrepancies to be discovered and investigated as early as possible.
Standardized financial documentation
Standardizing the documents used for financial transactions—such as invoices, internal material requests, inventory receipts, and travel expense reports—helps maintain consistency in record-keeping over time.
Standardizing the way information is captured and stored can help organizations track down discrepancies and ensure that critical data is not lost.
Standardized formats can make it easier to review past records, find specific information, and compare data from different systems.
When documents are not in a standardized format, finding the source of a discrepancy can be difficult.
Lays the groundwork for a good internal control system
Accounting is an essential part of running a business. It helps to keep track of finances and ensure that the money being spent is used effectively.
However, accounting can be time-consuming and challenging, so it is essential to have a reliable system in place.
Succor Center can help you implement an internal control system that will make your accounting more efficient and accurate.
Succor Center’s team of accounting professionals has extensive experience helping companies of all sizes improve their accounting processes. We can help you with bookkeeping, preparing financial statements, and more. Contact us today to get started!