Finance Business

Internal Control System- Analysis of Benefits & Limitations

Internal Control System is the process executed by the management to ensure the safeguarding of assets, maintenance of efficiency and effectiveness in operations and trustworthiness of financial statements to prevent any fraudulent conduct or wastage of resources.

Benefits of Internal Control System

The right control system can generate numerous benefits for the organization and help in achieving of organizational goals.

Benefits of a Good Control System

• Improving accountability of operations
• It helps in the safeguarding of assets and reduces fraudulent transactions
• Improving the efficiency of operations
• Increasing financial transparency
• Meeting legal and statutory regulations
• Establishing monitoring procedures
• Protection and optimum utilization of resources

Components of Control System

Control System comprises of a large number of activities and procedures working together.

1) Control Environment

Control environment is the base of all other standards of internal control system. It comprises working approach and outlook of management that guides the execution of all other activities in the system.

It addressees the morale values, ethics, work philosophy, objectives and management style of the organisation.

Functions

• Establishment of internal structure and hierarchy
• Development of an ethical and moral code of conduct
• Establishing accountability and responsibility

2) Risk Assessment     

Risk assessment is the process of identifying, analyzing and managing the risks that can be a threat to achievement of organizational goals.

This component not only includes assessment of risks but also management of same.

The risk assessment process covers both internal and external risks of the organisation.

The risk management part deals with prevention and avoidance of risks with help of tools and strategies.

Functions

• Assessment of risks
• Based on pre-established objectives
• Risk identification and mitigation
• Risk management

3) Control Activities

Control activities are a sum of rules, policies, and procedures that ensure that the directives of the management are implemented effectively.

Functions

• Development of control activity functions
• Establishment of internal technology control
• Deployment of policies and bylaws

Control Activities can be divided in to four categories

4) Information & Communication

Effective communication and timely exchange of important information can help the management to achieve their organizational goals and reduce the risks associated with them.

Control over information and communication helps in better management of operations. It is important to ensure the right flow of information.

The communication and exchange of information should be in a appropriate language to be understood easily by the end-mile users..

The communication should be in detail but not over informative in nature.Ensuring the safety of exchange and privacy of information should also be taken consideration.

Functions

• Setting up channels of internal & external communication    
• Establishing communication flow
• Safety and Privacy of information

5) Monitoring Activities

Monitoring is a continuous process for an organization. It verifies that whether the control system is working according to the desired standards or not.

Functions

• Evaluation of organizational activities
• Communication of deficiency to top management
• Comparison of targets with actual results

What is an Ideal Internal Control System ?

An ideal control system is the one which satisfies the objectives of the business as well as ensures the efficiency in operations. A system should be able to detect the deficiency in organisational activities.

The right control system should be able to assimilate with the working environment of the organisation smoothly.

Such a system should not be stand alone practice but be a part of day to day activities of the organisation.

Limitations of Internal Control System

Although a Control system seems like a complete guarantee against any occurrence of fraud or misconduct but it has its own set of limitations.

• Frauds can occur even during a robust control system.
• The control system does base on cost-benefit analysis.
• The pace of business expansion and diversification can outpace the development process of the control system.
• Management can tend to overlook the standard controlling process in times of crisis.

In order to cover most of the limitations , one should pay attention during the business plan stage. Planning for a suitable control system can reduce these limitations.

Conclusion

Internal control is a continuous process. This is a means to reach organisational goals in a sustainable manner.

An effective control system is not a procedure manual or list of rules but it must be practiced by people at every level of the organisation.

Internal control should be maintainable in nature and not overlap the management activities of the organisation.