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Internal Control System

An internal control system is defined as policies and procedures that provide reasonable assurance that organizational objectives will be achieved. The Turnbull report recommends that organizations have a sound internal control system. The objectives of an internal control system are to ensure efficient operations, compliance with laws and regulations, protection of assets, fraud prevention, timely financial reporting, and accurate accounting records. Benefits include effective operations, reliable financial reporting, and compliance. Limitations include that controls cannot replace poor management and only provide reasonable assurance of objectives. Elements of an effective system include control environment, risk assessment, information and communication, control activities, and monitoring.

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Mohammad Essmaeel Ali Jami
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144 views

Internal Control System

An internal control system is defined as policies and procedures that provide reasonable assurance that organizational objectives will be achieved. The Turnbull report recommends that organizations have a sound internal control system. The objectives of an internal control system are to ensure efficient operations, compliance with laws and regulations, protection of assets, fraud prevention, timely financial reporting, and accurate accounting records. Benefits include effective operations, reliable financial reporting, and compliance. Limitations include that controls cannot replace poor management and only provide reasonable assurance of objectives. Elements of an effective system include control environment, risk assessment, information and communication, control activities, and monitoring.

Uploaded by

Mohammad Essmaeel Ali Jami
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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INTERNAL CONTROL SYSTEM

Definition: Internal control system can be defined as "policies and


procedures in place to give reasonable assurance that organizational
objectives will be acheived". It is one of the way to manage risk in an
organization.

Turnbull report presented by Nigel Turnbull states that a sound internal


control system should exist in an organization. Characteristics of sound
internal control system are:

 ICS should be embedded within operations of a business and should not


be taken as a separate exercise.

 ICS should be able to respond to changing risks within and outside the
organization as mostly organizations operates in turbulent environment.

 ICS should include procedures for reporting control failings or


weaknesses.

Objectives: The objectives of internal control systems are to ensure:


 Efficient and orderly conduct of business and adherence to internal
policies.

 Compliance with relevant laws and regulations.

 Safeguarding of assets of the business (physical and information).

 Prevention and detection of frauds and errors.

 Timely preparation of financial statements.

 Accuracy and completeness of accounting records.

Benefits: of internal control system are:

 Effectiveness and efficiency of operations.

 Reliability of financial reporting.

 Compliance with applicable laws and regulations.


 Increase confidence of investors in the company.

Limitations: There are certain limitations of internal control system,


noting in particular:

 A good internal control system cannot turn a poor manager into a good
one.

 The system can only provide reasonable assurance regarding


achievement of its objective, all systems can be subject to mistakes or
errors.

 Internal control system can be by-passed through collusion of


employees and management override.

 Controls are only designed to cope with routine transactions and event,
they may not be compatible with unforeseen events.

 There are resource constraints that limits the effectiveness of internal


control system.
Elements of an effective Internal Control System:

 Control Environment

 Risk Assessment

 Information and Communication

 Control Activites

 Monitoring

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Author: M. Essmaeel Ali Jami

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