Definition: Internal Control can be defined as a system designed, introduced and maintained by the company’s management and top-level executives, to provide a substantial degree of assurance in achieving business objective, while complying with the policies and laws, safeguarding the assets, maintaining efficiency and effectiveness in regular operations and reliability of financial statements.
Objectives of Internal Control System
- To ensure that the business transactions take place as per the general and specific authorisation of the management.
- To make sure that there is a sequential and systematic recording of every transaction, with the accurate amount in their respective account and in the accounting period in which they take place. It confirms that the financial statement fulfils the relevant statutory requirements.
- To provide security to the company’s assets from unauthorised use. For this purpose, physical security systems are used to provide protection such as security guards, anti-theft devices, surveillance cameras, etc.
- To compare the assets in the record with that of the existing ones at regular intervals and report to the those charged with governance (TCWG), in case any difference is found.
- To evaluate the system of accounting for complete authorisation of the transactions.
- To review the working of the organization and the loopholes in the operations and take necessary steps for its correction.
- To ensure there is the optimum utilization of the firm’s resources, i.e. men, material, machine and money.
- To find out whether the financial statements are in alignment with the accounting concepts and principles.
An ideal internal control system of an organization is one that ensures best possible utilization of the resources, and that too for the intended use and helps to mitigate the risk involved in it concerning the wastage of organization’s funds and other resources.
Types of Internal Control System
- Preventive Controls: These controls are introduced in the firm to stop errors and irregularities from taking place.
- Detective Controls: These controls are implemented to reveal errors and irregularities, once they take place.
- Corrective Controls: These controls are designed to take corrective action for removing errors and irregularities after they are detected.
The type of internal control system implemented in the organization will be based on the company’s nature and requirements.
Internal Control System is important for every organization, for efficient management as well as it also assist in the company’s audit. It includes all the processes and methods to help the company in reaching its ultimate objective.