Question

In a business, management is responsible for running all aspects of the entity. In theory, the broad objectives for the business will be set, e.g. operating the business efficiently and effectively, the risks which threaten the objectives set will be identified, and suitable responses to the risks will be put in place. These responses will include implementing a proper information system (including proper books, records and documents), employing competent staff, and implementing policies and procedures, including sound control activities.

In your view

1.Explain, from an internal control perspective, why it is important for a company to set the objectives of all aspects of the company.

2.Define the term internal control.

Answer 1

1. Objectives of company in perspective of internal control are :

1. Establish Protocols and Procedures : By creating internal controls, small business owners establish protocols and procedures their staff and consultants must follow. Small business owners inform their employees of these protocols and expect that they follow them as they perform their day-to-day work duties. These established protocols help bring order and cohesiveness to companies, as everyone knows what's expected, as outlined in the internal controls.

2. Prevent Fraud and Theft : Establishing internal controls can help companies prevent or reduce fraud and theft within their organizations. Internal controls can include activities such as reconciling bank statements and internal audit reviews, which can uncover whether the company's money is being misappropriated by management or employees.

3. Separation of Duties: Internal controls separate the duties employees have, ensuring that there's a system of checks and balances. For example, a company's internal controls might make sure that an employee who does the company's accounts receivable doesn't also do the company's accounts payable. This can also help reduce internal fraud and theft.

4. Organize Financial and Management Information : Internal controls can help your small business keep its financial and management information organized. Organized data can increase productivity and better prepare your business if you need to produce documents for litigation or if you need to grab information for compliance reviews or audits. This might include giving each employee his own password to access files and data on the company's computer, or creating a system for filing client data and financial documents, online or offline.

5. Reduce Errors Through Training : Internal controls can help companies reduce errors, which can help them save money and protect their reputations. Employee training is an example of an internal control that can reduce errors. By training employees on processes and procedures, and updating them on new ones, employees are less likely to make mistakes. Training can include how to use an internal computer program or learning a new work process that exists between departments.

2. Internal Control : Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Besides complying with laws and regulations and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.