Importance of internal Control and Objectives (6 Reasons )

What is internal control?

Internal control can be defined as a process that can be affected by key personnel of an organization including management, board of trustees, and other relevant individuals. The importance of internal control is crucial to the success of any organization or business. These key figures in the management of an organization are responsible for ensuring that certain objectives are met. These objectives may include reliability in financial reporting, the effectiveness of operations and activities, and compliance with the rules and regulations of the organization. Different types of internal controls help an organization enjoy the importance of internal control. The three major types of internal control are discussed as follows:

1. Detective: Detective internal controls are responsible for detecting and highlighting the loopholes that occurred within the organization.
2. Corrective: Corrective internal control is responsible for making sure that the issues and irregularities highlighted in the previous step are corrected.
3. Preventive: This type of internal control tries to make sure that errors and irregularities are avoided in the first place.

Importance of Internal Control in an Organization

When it comes to the importance of internal control in an organization, it is worth mentioning that an organization cannot succeed without ensuring internal control and meeting objectives relevant to it. It is important because every organization plans to meet certain objectives to get successful. Furthermore, it is not possible to achieve these objectives unless internal control is ensured. It can be said that internal control enhances the chances of an organization achieving its objectives.

Moreover, if the internal control process is defined reasonably and followed well, it would be helpful for the organization to maintain its efficiency and effectiveness. Hence, the importance of internal control is connected to the performance of the business or organization. Besides, some other benefits can be enjoyed only by implementing the internal control process in the organizations. Some of them are discussed below:

1. Achieving objectives:

   Every organization has some operational objectives that it tends to achieve. For example, reliable and accurate financial reports. Internal controls help the organization achieve such objectives.

2. Risk reduction and improved performance:

   An effective internal control process helps the organization use its resources for its main purpose. It also reduces the misuse of resources.

3. Improves accountability at different levels within the organization:

   The control of internal control process is in the hands of key personnel of the organization. Therefore, they are the ones who are responsible to ensure the sound implementation of this plan.

4. Stabilizes business functions and internal operations:

   It helps the executives to observe the functionality of the organization. It also highlights what processes are being used by the company.

5. Enhances confidence in the finances:

   The internal control process helps to improve the trust of stakeholders in the finances of the organization. If a company implements internal control before going public, it will be in a better position to save some costs as well as overcome several challenges during sales.

6. Reduces the fee of external audit:

   The companies that have the internal control processes implemented are in a better position to enjoy reduced fees for the auditor. It is so because the auditor will be required to invest less time in completing an audit of the organization. On the other hand, the scope for auditors in the company would also be reduced.

Objectives of Internal Control

The importance of internal control in an organization is undeniable because it is meant to meet certain objectives. The objectives of internal control help the organization in achieving a certain goal which can further assist in avoiding any sort of loss or damage. The policies of the organization must be in line with the objectives of internal control. The objectives of internal control are discussed below with reference to the audit:

• Completeness: This objective ensures that all the relevant and valid transactions are kept in record and nothing is omitted.
• Authorization: It makes sure that a relevant officer has approved all the transactions before the transaction is entered into the record.
• Accuracy: It ensures that all the data is entered into the record on time. Moreover, it also validates that the transactions made were accurate.
• Validity: It ensures that the transactions represent the economic events that actually took place.
• Error handling: It deals with the wise handling of the errors detected. This objective of the internal control process makes sure that the detected errors are corrected as soon as possible. Moreover, it also ensures that they are reported to the relevant management personnel.
• Physical safeguards and security: It is to ensure that the information systems, as well as the physical assets of the organization, are controlled by authorized management only.
• Segregation of duties: It deals with the reasonable distribution of responsibilities. It makes sure that responsibilities are distributed in a manner that every member of the team either works on the recording function or processing of the transaction.

Common internal controls within an organization

Every organization regardless of its size implements this phenomenon owing to the importance of internal controls. Few very common practices to implement internal controls within an organization are as follows:

• Strong tone at the top
• Leadership discusses the importance of quality
• Accounts are reconciled on a monthly basis
• Leaders review the financial results regularly
• Log-in credentials
• Limits are ensured on signing cheques
• Decisions are made regarding physical access to cash and inventory
• Invoices are marked as paid to avoid making payments twice
• Leaders review the payroll

Limitation of Internal Controls

It does not matter how well the internal controls have been designed, they still assure a certain extent only. Furthermore, certain limitations edge the effectiveness of all the internal control systems. No doubt, they do not eradicate the importance of internal control yet they cannot be avoided. Some of them are discussed below:

• Breakdown: Sometimes a promising internal control system can also experience a breakdown due to several uncertainties. Some of these uncertainties include, if employees misunderstand the instructions of their seniors, make mistakes despite understanding the instructions, the organization has introduced a new technology that the employees are still learning to handle or the computerized information system is complex to understand. All these challenges can result in the breakdown of an effective internal control process.
• Judgment: A good internal control program is dependent upon the decisions and judgment made by human beings i.e. the key officials responsible for managing the program. Therefore, the effectiveness of the program is dependent, and its scope is limited to decisions based on human thinking. These individuals make decisions based on information available to them.
• Collusion: The control systems can also lose their effectiveness if the team of employees unites to change the financial data. They can team up and change the other management information which even the control system fails to detect.
• Management Override: Someone from the top management may take a decision, not in compliance with the rules and regulations of the organization, keeping in view his own benefit. However, this should not be confused with the decisions that management takes for the benefit of the organization by introducing modifications to the existing policies.

Conclusion

Implementing internal control within the organization is mandatory to make the business successful which itself speaks for the importance of internal controls. No matter if the business is big or small, the effectiveness of internal controls would be the same in either situation. Internal control is important because it assures to some extent that things would not go wrong. It also means that internal controls play a substantial role in avoiding and dealing with the risks.