Question

You are finishing up a first time audit on a new client who has grown rapidly over the last few years. They recognize the need to establish a system of internal control. Write a letter to the client discussing the elements and importance of internal control. Cite professional literature and provide them with an action plan. Their accounting staff consists of an accounting manager, A/P, A/R, and payroll clerks plus a file clerk. 

Answer 1

Elements and Importance of Internal Control

Internal Controls are the systematic measures adopted by a company to ensure the integrity of financial information of an entity. It refers to all the policies and procedures adopted by management to ensure operational effectiveness, accountability and timely compliance of laws, regulations and policies. In growing business entities, like yours, Internal Controls are a must as they help keep a check on all activites cited above. Thus, a robust system of internal control must be established so as to safeguard the assets of a business, prevent frauds or malicious acts from occuring and report the occurrence. Implementation of internal controls provide reasonable assurance rearding the attainment of operational objectives of a business such as effectiveness and efficiency of opeartions, accurate and reliable financial reporting and compliance with applicable standards.

There are five elements of Internal Control, the accounting manager must be aware of while designing a system of Internal Controls-

1. Control Environment- It refers to the attitude of management and employees concerning the need for Internal Controls.
2. Risk Assessment- This refers to the review of the critical risk areas and designing controls on those lines to counter the risk.
3. Control Activities- This is basically the use of IT systems and other resources to ensure that the controls are appropriately designed and are opearting properly.
4. Information & Communication- For the shortfalls to be addressed properly, the information about the controls must be communicated well to the management.
5. Monitoring- These set of processes are used by management to ensure that the internal controls are functioning properly.

Thus, we see the importance of Internal Control system in businesses especially growing ones!

An action plan must be drawn and responsible parties- being the process owner must be held accountable for establishment of controls in their respective fields. The Completion date must be finalised to implement the solution or resolve an issue.

The Accounting manager, Accounts Department and general administration, must all come together and help in the implemementation of Internal Controls for the innumerable benefits and better compliance with laws.