What are Internal Controls?

Internal control system refers to the processes set by the management of an entity to control and ensure the effective operation of the organization. The system is instituted and managed by the company`s management, the board of trustees, and other personnel in the organization to create assurance regarding the achievement of the following objectives:

• Financial reporting reliability
• Efficiency and effectiveness in the company operation
• Compliance with the instituted laws and regulations.

Types of Internal Control Systems

There are three main types of internal control which include; detective, corrective and preventive controls. Detective controls are the internal controls that are designed to detect irregularities and errors that may occur in the system. Secondly, corrective controls are designed to correct the irregularities and errors that have been detected. Lastly, preventive controls are designed to prevent the occurrence of errors and irregularities. 

What are the Limitations of the internal controls?

Regardless of how well the internal control systems are developed, they only present reasonable assurance as to whether the set objectives have been achieved. The limitations of the internal control are based on inherent factors which include: 

• Judgment- the effectiveness of the internal control system depends on the decisions that are controlled by the human judgment. Some decisions are made under pressure and based on the information at hand. 
• Breakdowns - internal control systems are subjects to breakdowns. The employees in the organization may sometimes misinterpret the instruction or make mistakes thus affects the effectiveness of the system. Human errors may also affect the applicability of the system, especially in the complex technology environment. 
• Management override - the personnel at the higher level of the organization structure may override the policies set for personal gain. However, this should not be confused with management intervention whereby the management can intervene by avoiding some organization policies and procedures for the benefit of the company. 
• Collusion- control system can be subject to employee collusion. Employees may act collectively to change or derail the financial data or other management information in a way that cannot be detected by the system. 

What are the Objectives of internal controls? 

The objectives of the internal control system aimed at minimizing the potential waste, unauthorized access, loss, or misappropriation. For the objectives of an internal control system to be effective, its compliance must be observable and measurable. The internal control system is evaluated by the internal audit that assesses the ability control processes to achieve the predetermined objectives. Some of the objectives of internal control include completeness, authorization, accuracy, physical security, and safeguard, validity, segregation of duties and handling of errors. 

Authorization- this objective ensures that all transactions in the organization are approved by authorized and responsible personnel in compliance with general or specific authority before they are recorded in the financial statements. 

Completeness - the main aim of this objective is to ensure that all valid transactions are captured and recorded in the financial records. 

Accuracy - the key aim of this objective is to ensure that all the transactions are accurate and reliable to the source data and the financial information is recorded in a timely manner. 

Validity - this objective seeks to ensure that all the transactions recorded in the financial books are fairly presented and reflect the economic value of the activity that has occurred. It ensures that economic transactions are recorded according to the provided laws and guidelines and executed according to the authorization by the management. 

Physical security and safeguards - this objective aims to control physical access to information and assets of the organization Handling of errors- this objective seeks to ensure that errors in the financial data and other organization`s information are detected at every stage and develop mechanisms to correct the error. 

Segregation of responsibilities - this objective ensures that specific duties are assigned to particular individuals in a manner that no individual control or has more than one duty. For examples, it seeks to ensure that no individual is allowed to approve and record the financial transactions. 

What are the Major components of the internal control system?

Control environment  this refers to the factors that influence the control system and cognitive of the employees. This comprises of seven factors which include: integrity and ethical values, human resource practice and policies, commitment to competence, assignment of responsibility and authority, operating style and management philosophy, organizational structure and lastly the participation of board of directors or audit committees. 

Risk assessment- this includes the evaluation of the internal risks that may affect the effectiveness and of the organization record, process, analyze and report financial data. The risk assessment includes the evaluating changes in the: changes in the operating environment, personnel, information system, technology, rapid growth, new activities, lines or products foreign operation, corporate restructuring, and accounting pronouncement. 

Control activities- this evaluate various procedures and policies that help in ensuring that necessary actions are taken to address the factors that hinder the achievement of the organization`s objectives. These include the review of performance, processing of information physical security and controls and lastly segregation of duties. 

Information and communication- this is concerned with methods that are established to process, record, analyze, and report financial transactions. It also ensures that the accountability of liabilities and assets are maintained. It aims to accomplish the following: determine and record all financial information, present the financial information in a timely basis, appropriate measurement of value, ensuring that financial statements are recording within the appropriate time, ensuring that financial statement is properly disclosed and presented and lastly present the duties and responsibility of each employee. 

Monitoring- these include the assessment of the performance of quality control over time.