Elements of internal control

The success of an organization is dependent on the successful implementation of internal controls that mitigates risks and ensures achievement of business objectives. Internal controls are activities and arrangements set up by an organization to ensure efficiency in operations, accuracy of financial and operational reporting, safeguarding of assets, and compliance with laws, policies and contracts. In my view following are the key elements of internal controls:

1. Segregation of duties
The division of an operation into a series of sub-operations undertaken by different people, allows for internal checks to take place. Such a control merely reduces the chance of error or irregularity occurring, but it does not eliminate the risk. It reduces the risk of intentional manipulation and error with increased element of checking. Functions which needs to be separated include those of authorization, execution, custody, recording, reporting and in case of computer based accounting system; system development and daily operations.

2. Structure of the organization
The structure or patterns of an organization means a system of arrangement and relations as between various levels of personnel for carrying out of plans and policies towards achievement of objectives for which a business stands. Enterprises should have a plan of their organisation, defining and allocating responsibilities and identifying lines of reporting for all aspect of the enterprise's operations including the controls. The delegation of authority and responsibility should be clearly specified. It is important that critical operations are provided with the appropriate status and communication within the organizations. Internal auditor should check viability of the organization structure considering its business objectives.

3. Objectives and Policies
Objectives are definite goals, purposes or accomplishments which the top management lay down and aims to achieve. The functional segments of the company should comply with the policies, plans, procedures, external laws and regulations and the work should be performed in a coordinated manner.

Policies and procedures give an indication as to the nature of personnel behavior in their functioning and reflect the attitude of management. Functions of different staff members should be integrated in a manner that is complementary and each acts as check on the other. For instance, wage sheets should be prepared and checked by different set of staff and their disbursement should be in presence of a responsible official.

4. Authorization and approval

All transactions should require authorizations or approval by an appropriate responsible person. The limits of these authorizations should be specified.

5. Personnel

There should be procedures to ensure that personnel have capabilities commensurate with their responsibilities. In fact, the proper functioning of any system depends on the competence and integrity of those operating it. The qualifications, selection and training as well as the innate personal characteristics of the personnel involved are important features to be considered in setting up any control system.

6. Management

Management is responsible for establishing, monitoring and reviewing systems of internal control. In practice, management may delegate the reviewing function to the internal auditor. It is thus the duty of internal auditor to provide management with reassurance concerning the efficiency and effectiveness of internal controls.

7. Records and Reports

The accounting an other records should be maintained accurately and adequately so as to assist the management in formulating present and future events in decision making and planning.

Reports are the media of presentation of information to the management. In order to make reporting effective, it should be timely, tailor-made and present all facts concerning problem areas, assessments etc.

8. Accounting controls

These are controls within the recording function which check that the transactions to be recorded and processed have been authorized, and that they are all included and that they are correctly recorded and accurately processed. Such controls include checking the arithmetical accuracy of the records, the maintenance and checking of totals, reconciliations, control accounts and trial balances, and accounting for documents.

9. Protection of assets

These are concerned mainly with the custody of assets and involve procedures and security measures designed to ensure that access to assets is limited to authorized personnel. These include both direct access and indirect access via documentation. These control assume importance in the case of valuable, portable, exchangeable or desirable assets.

10. Supervision

Any system of internal control should include the supervision by responsible officials of day-to-day transactions and the recording thereof. The supervisory role undertake by staff should be allocated to those with proper training and suitability to such a function.