Internal control can be said to be a process wherein the structure of the organization, authority, and the information system are designed in such a way that it helps the organization meet its aims and goals. It's a way by which the resources of an organization are measured, monitored, and directed.
The top management puts in place such measures so that frauds are prevented, and the resources of an organization are protected.
Some of the main objectives of this process are to ensure that the financial management is proper, and to give feedback on whether or not the organization has achieved its goals and objectives. The idea is to set up an organizational structure where there are checks and balances in place among departments.
Let's take a look at some of the key objectives of internal control and their importance, so that you get a better idea of its necessity.
Reliability is the main reason for setting up a structure of internal control. The structure is set up so as to make sure that the monetary transactions carried out are in sync with the operational activities of the company.
Internal control is of utmost importance, as it ensures that money is not stolen, lost, or there are no errors in depositing money into accounts.
The best way to keep a check on such errors is to use internal auditing and accounting software, or better still, pay employees through checks and provide receipts for the same. As such, internal control in accounting is of high importance in any organization.
Some of the other major objectives are reliability of information and timeliness. It's important that the top management is provided with accurate information, as they rely on this data to make important decisions. Control is necessary so that financial information is transparent and accessible to the decision makers.
Confirming to Regulations
Following rules set by the government require huge investments, especially that of time. Therefore, internal control is necessary so that the organization follows the rules applicable, thereby avoiding legal consequences. Moreover, it also reduces costs which an organization may have to incur if it does not follow the rules.
The process helps avoiding wastage of precious resources, besides increasing efficiency. Efficiency is one of the most important factors for an organization to maintain competitiveness, and in the process maximize profits.
If internal controls are effective, it can ensure that the standards are being met. Best practice processes and performance reviews are some of the internal control systems which organizations use.
Safety of Material and Information
The process is very important to maintain safety measures, be it physical material or confidential information in an organization. There are set rules in an organization which helps maintain safe working conditions, thereby increasing productivity, and in the process, profits.
This aspect is very important, especially in banks and financial institutions which keep valuable assets in areas where employees work every day.
There are several strategies used by organizations for implementing internal control, which are effective and considered fool-proof.
Some of the vital tools which can be used include division of tasks and functions, creating an organizational structure which would keep a check on each other, policies which keep a tab on employee activity, physical control, and internal auditing.