INTERNAL CONTROL AND COOPERATE OBJECTIVES
HIGHER INSTITUTE OF BUSSINESS AND MANAGEMENT
A presentation submitted to the Accounting department in the partial fulfillment of the course
BUSSINESS ASSESMENT.
TOPIC:
INTERNAL CONTROL SYSTEM AND COOPERATE OBJECTIVES
Written and Presented by
FANDIO TCHASSEM EUNICE LORINDA
Speciality: ACCOUNTANCY
DEGREE LEVEL 3
COURSE TEACHER
MR. PENN GILBERT
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INTERNAL CONTROL AND COOPERATE OBJECTIVES
INTRODUCTION:
Internal control in accounting is a comprehensive framework designed to ensure the accuracy,
integrity, and reliability of a company’s financial information while safeguarding its assets.
This system encompasses policies, procedures, and processes aimed at preventing fraud,
detecting errors, and promoting operational efficiency.
Key elements of internal control include segregation of duties, approval and authorization
processes, reconciliations, and regular internal audits. Effective internal controls not only help
organizations comply with legal and regulatory requirements but also enhance decision-
making by ensuring that financial data is accurate and timely.
DEFINITION:
Internal controls are mechanisms, policies, and procedures designed to ensure accurate
financial reporting, safeguard assets, improve operational efficiency, and ensure legal
compliance. They help prevent fraud, detect errors, and ensure that financial activities are
conducted securely and systematically.
By establishing checks and balances, such as segregation of duties, transaction authorization,
and periodic reviews, internal controls create a system of accountability that protects the
financial integrity of an organization.
Objectives and Benefits of Strong Internal Control Systems
A robust internal control system serves multiple objectives, all of which contribute to the
efficient and ethical functioning of a business. These objectives include:
1. Ensuring accuracy and completeness: By systematically verifying transactions and
reconciling accounts, these controls minimize the risk of erroneous financial
information being presented to stakeholders, thus enhancing the credibility of the
organization.
2. Safeguarding assets from misappropriation or theft: Through mechanisms such as
segregation of duties and authorization procedures, strong internal controls create a
system of accountability and deter potential fraudulent activities.
3. Establishing compliance with laws and regulations: By implementing processes
that ensure adherence to legal requirements, organizations avoid penalties,
reputational damage, and potential legal liabilities.
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4. Optimizing operational efficiency: By standardizing procedures and reducing the
likelihood of errors, these controls streamline processes and improve the overall
effectiveness of business operations.
5. Promoting informed decision-making: Accurate and reliable financial information
enables management to make well-informed strategic choices, allocate resources
effectively, and identify areas for improvement.
Components of Internal Control
The components of internal controls are based on the framework established by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
COSO framework identifies five key components of an effective internal control system:
1. Control environment
The control environment sets the tone at the top of the organization, influencing the
overall culture and ethical behavior. It includes the organization’s values, integrity,
management’s commitment to competence, and the structure of authority and
accountability. It includes:
• Ethical values and integrity
• Management’s philosophy and operating style
• Organizational structure
• Assignment of authority and responsibility
• Human resources policies and practices
2. Risk assessment
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This component involves identifying and assessing risks that could impact the
achievement of the organization’s objectives. It includes evaluating both internal and
external risks and determining how to manage them. It includes:
• Identifying financial, operational, compliance, and strategic risks
• Estimating the significance and likelihood of risks
• Determining how to respond to risks (e.g., avoidance, mitigation, acceptance)
3. Control activities
Control activities are the actions and procedures that ensure management’s directives
are carried out to address identified risks. These can include approvals, authorizations,
verifications, reconciliations, and performance reviews. It includes:
• Segregation of duties
• Authorizations and approvals
• Physical controls over assets
• Documentation and recordkeeping
• Information processing controls (e.g., IT general controls)
4. Information and communication
Effective communication of relevant information throughout the organization is
essential for internal controls to function. This component ensures that important
information flows up, down, and across the organization, enabling individuals to fulfill
their responsibilities. It includes:
• Accurate and timely financial reporting
• Clear communication channels across the organization
• Internal and external communication about control activities and expectations
• Use of information systems to support decision-making
5. Monitoring activities
Monitoring ensures that internal controls function as intended and helps identify areas
for improvement. Ongoing evaluations, separate evaluations, or a combination of both
can be used to monitor the effectiveness of internal controls. It includes:
• Regular review of control activities
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• Internal audits and other assessments
• Continuous monitoring of IT systems and financial transactions
• Feedback mechanisms for reporting control deficiencies
Types of Internal Control
The three main types of internal controls are preventive controls, detective controls,
and corrective controls. Each serves a different purpose in mitigating risks within an
organization.
1. Preventive controls
These controls are designed to stop errors or irregularities before they occur. Their
primary focus is on preventing problems, such as fraud, misstatements, or operational
inefficiencies, by establishing procedures and safeguards upfront.
2. Detective controls
Detective controls identify errors or irregularities after they have occurred. Their
purpose is to detect problems in a timely manner so that corrective action can be taken.
These controls are crucial for monitoring ongoing processes and providing feedback for
improvement.
3. Corrective controls
Corrective controls aim to rectify issues identified by detective controls and mitigate any
harm caused by the error or irregularity. These controls are designed to fix the problem,
address the root cause, and prevent its recurrence.
Examples of Internal Control
Internal controls come in various forms and are implemented across different
organizational processes. Here are several key examples of internal controls:
1. Segregation of duties
This control ensures that no one person has control over all aspects of a financial
transaction. For example, the person responsible for approving purchases should not
also be responsible for recording the transaction in the accounting system. This reduces
the risk of errors and fraud by distributing responsibilities.
2. Authorization and approval controls
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These controls require that specific transactions or activities receive approval from a
designated individual with authority. For instance, large purchases might need approval
from a manager or executive to ensure they are legitimate and necessary for the
business.
3. Reconciliations
Regular reconciliations involve comparing different sets of data to ensure consistency
and accuracy. For example, bank reconciliation compares the company’s cash records
with bank statements to identify any discrepancies or unauthorized transactions.
4. Physical controls
Physical controls safeguard assets by restricting access. Examples include locks on
storage rooms, swipe cards for secure areas, and safes for cash. Limiting access to
valuable assets reduces the risk of theft or damage.
5. Information processing controls
These controls ensure the completeness, accuracy, and authorization of transactions
processed by information systems. Examples include validation checks on data entry
and system-based access controls to prevent unauthorized use.
6. Internal audits
Internal audits are independent evaluations of an organization’s internal controls and
processes. Auditors review financial records, policies, and procedures to ensure
compliance, identify risks, and suggest improvements to internal controls.
7. Documentation and recordkeeping
Proper documentation of transactions and processes is essential for maintaining
accurate records. Examples include retaining invoices, receipts, contracts, and
supporting documentation for all financial transactions. This creates a clear audit trail
and facilitates compliance.
Limitations of Internal Control
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While internal controls are essential for safeguarding an organization’s assets and
ensuring the accuracy of financial reporting, they have certain inherent limitations.
Some key limitations of internal controls include:
1. Human error
Internal controls rely on individuals to execute them correctly. Mistakes such as
miscalculations, oversight, or failure to follow established procedures can occur, leading
to errors in financial records or operational inefficiencies. Even well-designed controls
may fail if individuals are careless or inadequately trained.
2. Collusion
Internal controls can be bypassed when individuals collude to commit fraud. For
example, if two employees work together to override controls such as authorizing
unauthorized transactions or manipulating records, the effectiveness of segregation of
duties and other controls can be compromised.
3. Management override
High-level managers or executives may have the ability to override controls, especially if
they have significant authority in the organization. For instance, a senior manager may
approve transactions that don’t meet standard control requirements, undermining the
system and increasing the risk of fraud or misstatements.
4. Changing conditions
Internal controls are often designed based on existing processes and risks. However,
organizations evolve over time, and new risks can emerge due to changes in technology,
operations, or the regulatory environment. If controls are not updated to reflect these
changes, they may become ineffective in addressing new risks.
5. Lack of understanding or awareness
Employees or management may not fully understand the purpose or importance of
certain controls, leading to non-compliance or improper execution. Inadequate training
or communication regarding internal controls can limit their effectiveness.
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6. External events
Internal controls cannot fully account for external events beyond the organization’s
control, such as natural disasters, economic downturns, or regulatory changes. These
events may disrupt operations or cause losses despite the existence of strong controls.
Principles of a good internal control system
Competent and trustworthy staff. People in charge of internal control system must be
reliable and highly competent about the work. Lack of knowledge and dishonesty will
spoil the efficiency of the system.
A good internal control system must have good documentation. Records of financial
and other organisational plans must be available for the system to work well.
Segregation of duties must be present. This will help prevent fraud, bias etc. For
example, a clerk in charge of accounting function should not be control of assets too.
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