INTERAL CONTROL SYSTEM
DEFINITION
The internal control system comprises all of the systems set up and
maintained by management to facilitate achieving its objective of
ensuring, to the extent possible, the orderly and efficient conduct of the
institution’s activities (for example, policies, procedures, accounting
system, job descriptions, internal control grids, etc.).
OBJECTIVES OF THE INTERNAL CONTROL SYSTEM
Asset protection
Reliability of the records
Profitability
Fraud prevention and detection
Compliance with legal and regulatory aspects.
GUIDING PRINCIPLES OF THE INTERNAL CONTROL SYSTEM
There are eight guiding principles management needs to take into account
when developing its internal control system: -
Balance Between Profits and the Costs of the Internal Control System
Distinctiveness of Each Internal Control System
Analysis and Understanding of the Risks
Quality of the Human Resources
No Concession in the Internal Control System
Concentration of Efforts in the Operations of the Institutions
Examination/Audit Department
Internal Control System for Emerging Institutions
TYPES AND NATURE OF THE INTERNAL CONTROLS
The internal control system presented in this module rests on the three
following control levels:
1. Operational Controls
Integrated into the work processes
Daily or in a time span very close to the operation
Goals:
verify the recording of the information
verify the relevance of the supporting and other documents
verify compliance with the rules and regulations, standards, policies,
delegations of power, decisions and practices
Performed only by the authorized persons (with a confirming mark affixed
to the supporting documents and records)
Example:
Obtaining an authorization
2. Supervisory Controls
Added to the work processes
Frequent, at regular intervals
Goals:
ensure the execution, analysis and verification of the operations
according to the rules and regulations, policies, standards and practices
measure the efficacy of the application of the preventive measures
assess in part the quality of the work done by the employees
Performed by the persons in charge of management or the employee who
has been delegated, while avoiding incompatible duties
Example:
Unscheduled cash count
3. Management Controls
Addresses the results obtained
Ongoing in all the controls
Purposes:
verify that the results obtained conform to the objectives or the reason
for the cooperative’s existence
evaluate the quality of the controls exercised by the different persons
in charge in the SACCOS
Performed by the person responsible for management (possible delegation
in large SACCOS)
Example:
Analysis of the balance sheet as opposed to the budget.
Preventive controls
The purpose of preventive controls is to prevent voluntary errors (fraud).
Their goal is to ensure through the different operating controls that the
operations and activities comply with the financial institution’s regulations,
standards, procedures, delegations of power, and administrative decisions
and practices. Their effect is to dissuade an employee who would like to
commit a fraud. For example, obtaining authorization from a superior when a
member appears at a SACCOS to reactivate his inactive account is a
preventive control.
Detection controls
The purpose of detection controls is to uncover errors, whether involuntary
or not, or at least to increase the chances of discovering them. In addition,
the mere fact that detection controls exist may have a preventive effect, just
as preventive controls can become detection controls. For example, an
unscheduled count of the cash and instruments kept in the SACCOS’s till or
safe is a very effective detection control.
FRAMEWORK OF THE INTERNAL CONTROL SYSTEM
Normally, this framework is composed of the following elements, all of which,
individually and as a whole, have an influence on the quality of the internal
control: -
Leaders (Members of the Board and the Supervisory Committee)
Management Team (Manager in Charge and Executive Employees)
In-House Controller
Examination and Auditing Mechanism
Control Systems per Section
Outside Influences
EXERCISING INTERNAL CONTROL
The Board
The Board is primarily responsible for the management of the SACCOS.
However, for practical reasons, it delegates part of its responsibility to
the management team.
Supervisory Committee
The Supervisory Committee is an arm of the General Meeting of the
members. Because of this, it is the general control body of the financial
cooperative and, therefore, performs ongoing monitoring that extends
to all of the SACCOS’s affairs. The Supervisory Board is independent of
the Board and the management team; it derives its authority
exclusively from the General Meeting.
Management Team and Employees
To make sure that the staff members to whom responsibilities have
been delegated adequately discharge their obligations, the
management team puts in place an organizational structure, accepted
by the Board, and based on the delegation and the coordination of
well-defined responsibilities that comply with certain management
principles.
INTERNAL CONTROL LIMITS
Internal control enables the SACCOS’s management team to be reasonably
sure that its objectives are attained but, because of the limitations inherent
in internal control, no absolute certainty will ever be obtained in this regard.
Small Number of Employees
High Costs of Certain Controls
Unusual Operations
Employee Collusion
INTERNAL CONTROL TOOLS
The main elements of a good internal control system are its first tools. These
elements are the following:
Honest and competent personnel
An adequate administrative structure and clear job definitions
Adequate and properly used security equipment
Adequate documentation
An effective accounting system
Systematic supervision
REVIEW QUESTIONS
1. Define the term “internal control system”
2. Mention objectives of the internal control system
3. There are eight guiding principles management needs to take into
account when developing its internal control system. Discuss
4. Esxplain types of internal control system
5. Normally, framework of the internal control system is composed of the
following elements, all of which, individually and as a whole, have an
influence on the quality of the internal control. Discuss
6. Describe three elements which exercising internal control
7. Internal control enables the SACCOS’s management team to be
reasonably sure that its objectives are attained but, because of the
limitations inherent in internal control, no absolute certainty will ever
be obtained in this regard. Discuss
8. The main elements of a good internal control system are its first tools.
Discuss