Justification for an Internal Control System Essay
Organizations exist to carry out their set goals and objectives. To achieve these goals, they must have a set of rules that direct their efforts toward the achievement of these goals and objectives. With this the need for a system of internal controls comes in. An internal control is a set of policies and procedures put in place by the management of an entity to help it achieve its goals.
“Internal control is a set of rules that provide reasonable assurance regarding the efficiency and effectiveness of operations; the reliability of financial information; the compliance with applicable laws and regulations.Its objective include the promotion of orderly, money-saving, and effective operations and quality products and services consistent with the organization’s missions; safeguarding of resources against loss because of waste, abuse, mismanagement, errors, and fraud; adhering to laws and management directives, developing, and maintaining reliable financial and management data and fairly disclosing that information in timely reports. ((Sawyer, 1996). This paper will present the need for a system of Internal Controls is important in an organization.Regardless of the size, internal controls play a crucial role in any organization. It has five basic components that include control environment; risk assessment; control activities; information communication, and monitoring.
The control environment sets and directs the tone at the top of the organization. Risk assessment identifies and analyzes the relevant risk that may stand in the way of achievement of organization’s objectives. Control activities are the various policies, rules, authorizations, verifications, reconciliations, methods and procedures necessary to bring about the achievement of goals and objectives.Information communication is the component that conveys the data needed for various organs of the organization to conduct their functions, whereas monitoring helps examine whether functions are performed according to plans. The need for a system of internal controls in an organization becomes paramount because of it helps to give a reasonable assurance regarding the integrity and reliability of financial information communicated to third parties and regulatory authorities.The integrity of financial statements can be ensured only if the system that produces the report is properly designed and operated effectively. Financial reports must be accurate and report exactly what they are supposed to report so that they could be useful, reliable, and relevant to internal and external users of the statement for decision -making regarding the organization.
Here a system of internal controls helps. In a compromised report the information content of the report will produce harm to anyone relying on it for decision-making.Again, Federal laws (Sarbanes-Oxley Act, section 404) govern the use of these statements. A system of Internal Controls helps organizations to comply with these requirements. A good system of internal controls helps an organization put measures in place to prevent fraud within the organization. Fraud is the intentional misrepresentation of material facts, and any illegal act meant to deceive someone in decision-making process that causes harm to the person (Sawyer, 1996).A system of internal controls helps an organization devise and incorporate a segregation of duties within the organization. It helps to ensure that no incompatible duties (e.
g. , accounts receivable is separated from accounts reconciliations) are performed by one individual. Internal controls ensure that employees are given unique personal identification numbers to use in logging on to the financial and other systems in the organization. Where an error occurs, it can be easily traceable to the unique identification number of the responsible employee.Internal Controls ensures that there are checks and balances incorporated into the system. The work of one employee is cross-checked and balanced by another. This way, there is a reduced tendency for fraudulent actions and keeps the organization focused on the achievement of its goals and objectives. With controls, an organization is able to safeguard the resources needed to make business activities possible.
With secure assets, organizations are able to produce goods and services, meet stakeholders’ demands, and increase the organization’s value.An effective system of controls increases transparency and credibility of an organization; ensures the integrity of financial reports, reduces errors, and fraud; ensures the safety of resources and helps in compliance with regulatory standards. This is why it is justifiable to have a system of internal Controls in an organization.ReferenceSawyer, L. B. (1996).
Sawyer’s Internal Auditing- The Practice of Modern Internal Auditing (4th edition). Altamonte Springs: Institute of Internal Auditors.