1、A Clear Look at Internal Controls: Theory and ConceptsHammed Arad (Philae)Department of accounting, Islamic Azad University, Hamadan, IranBarak Jamshedy-NavidFaculty Member of Islamic Azad University, Kerman-shah, IranAbstract: internal control is an accounting procedure or system designed to promot
2、e efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error. Internal Control is a major part of managing an organization. It comprises the plans, methods, and procedures used to meet missions, goals, and objectives and, in doing so, support performance-based m
3、anagement. Internal Control which is equal with management control helps managers achieve desired results through effective stewardship of resources. Internal controls should reduce the risks associated with undetected errors or irregularities, but designing and establishing effective internal contr
4、ols is not a simple task and cannot be accomplished through a short set of quick fixes. In this paper the concepts of internal controls and different aspects of internal controls are discussed.Keywords: Internal Control, management controls, Control Environment, Control Activities, Monitoring1. Intr
5、oductionThe necessity of control in new variable business environment is not latent for any person and management as a response factor for stockholders and another should implement a great control over his/her organization. Control is the activity of managing or exerting control over something. he e
6、mergence and development of systematic thoughts in recent decade required a new attention to business resource and control over this wealth. One of the hot topic a bout controls over business resource is analyzing the cost-benefit of each control. Internal Controls serve as the first line of defense
7、 in safeguarding assets and preventing and detecting errors and fraud. We can say Internal control is a whole system of controls financial and otherwise, established by the management for the smooth running of business; it includes internal cheek, internal audit and other forms of controls.COSO desc
8、ribe Internal Control as follow. Internal controls are the methods employed to help ensure the achievement of an objective. In accounting and organizational theory, Internal control is defined as a process effected by an organizations structure, work and authority flows, people and management inform
9、ation systems, designed to help the organization accomplish specific goals or objectives. It is a means by which an organizations resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organizations resources, both physical (e
10、.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks). At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance
11、with laws and regulations. At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g., how to ensure the organizations payments to third parties are for valid services rendered.) Internal control procedures reduce process variation, leading
12、to more predictable outcomes. Internal controls within business entities are called also business controls. They are tools used by managers everyday. * Writing procedures to encourage compliance, locking your office to discourage theft, and reviewing your monthly statement of account to verify trans
13、actions are common internal controls employed to achieve specific objectives.All managers use internal controls to help assure that their units operate according to plan, and the methods they use-policies, procedures, organizational design, and physical barriers-constitute. Internal control is a com
14、bination of the following：1. Financial controls, and2. Other controlsAccording to the institute of chartered accountants of India internal control is the plan of organization and all the methods and procedures adopted by the management of an entity to assist in achieving management objective of ensu
15、ring as far as possible the orderly and efficient conduct of its business including adherence to management policies, the safe guarding of assets prevention and detection of frauds and error the accuracy and completeness of the accounting records and timely preparation of reliable financial informat
16、ion, the system of internal control extends beyond those matters which relate to the function of accounting system. In other words internal control system of controls lay down by the management for the smooth running of the business for the accomplishment of its objects. These controls can be divide
17、d in two parts i.e. financial control and other controls.Financial controls:- Controls for recording accounting transactions properly.- Controls for proper safe guarding company assets like cash stock bank debtor etc- Early detection and prevention of errors and frauds.- Properly and timely preparat
18、ion of financial records I e balance sheet and profit and loss account.- To maximize profit and minimize cost.Other controls: Other controls include the following:Quality controls.Control over raw materials.Control over finished products.Marketing control, etc6. Parties responsible for and affected
19、by internal controlWhile all of an organizations people are an integral part of internal control, certain parties merit special mention. These include management, the board of directors (including the audit commit tee), internal auditors, and external auditors.The primary responsibility for the deve
20、lopment and maintenance of internal control rests with an organizations management. With increased significance placed on the control environment, the focus of internal control has changed from policies and procedures to an overriding philosophy and operating style within the organization. Emphasis
21、on these intangible aspects highlights the importance of top managements involvement in the internal control system. If internal control is not a priority for management, then it will not be one for people within the organization either.As an indication of managements responsibility, top management
22、at a publicly owned organization will include in the organizations annual financial report to the shareholders a statement indicating that management has established a system of internal control that management believes is effective. The statement may also provide specific details about the organiza
23、tions internal control system.Internal control must be evaluated in order to provide management with some assurance regarding its effectiveness. Internal control evaluation involves everything management does to control the organization in the effort to achieve its objectives. Internal control would
24、 be judged as effective if its components are present and function effectively for operations, financial reporting, and compliance. he boards of directors and its audit committee have responsibility for making sure the internal control system within the organization is adequate. This responsibility
25、includes determining the extent to which internal controls are evaluated. Two parties involved in the evaluation of internal control are the organizations internal auditors and their external auditors.Internal auditors responsibilities typically include ensuring the adequacy of the system of interna
26、l control, the reliability of data, and the efficient use of the organizations resources. Internal auditors identify control problems and develop solutions for improving and strengthening internal controls. Internal auditors are concerned with the entire range of an organizations internal controls,
27、including operational, financial, and compliance controls.Internal control will also be evaluated by the external auditors. External auditors assess the effectiveness of internal control within an organization to plan the financial statement audit. In contrast to internal auditors, external auditors
28、 focus primarily on controls that affect financial reporting. External auditors have a responsibility to report internal control weaknesses (as well as reportable conditions about internal control) to the audit committee of the board of directors.8. Limitations of an Entitys Internal ControlInternal
29、 control, no matter how well designed and operated, can provide only reasonable assurance of achieving an entitys control objectives. The likelihood of achievement is affected by limitations inherent to internal control. These include the realities that human judgment in decision-making can be fault
30、y and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes. For example, errors may occur in designing, Maintaining, or monitoring automated controls. If an entitys IT personnel do not completely understand how an order entry system processes sale
31、s transactions, they may erroneously design changes to the system to process sales for a new line of products. On the other hand, such changes may be correctly designed but misunderstood by individuals who translate the design into program code. Errors also may occur in the use of information produc
32、ed by IT. For example, automated controls may be designed to report transactions over a specified dollar limit for management review, but individuals responsible for conducting the review may not understand the purpose of such reports and, accordingly, may fail to review them or investigate unusual
33、items. Additionally, controls, whether manual or automated, can be circumvented by the collusion of two or more people or inappropriate management override of internal control. For example, management may enter into side agreements with customers that alter the terms and conditions of the entitys st
34、andard sales contract in ways that would preclude revenue recognition. Also, edit routines in a software program that are designed to identify and report transactions that exceed specified credit limits may be overridden or disabled. Internal control is influenced by the quantitative and qualitative
35、 estimates and judgments made by management in evaluating the cost-benefit relationship of an entitys internal control. The cost of an entitys internal control should not exceed the benefits that are expected to be derived. Although the cost-benefit relationship is a primary criterion that should be
36、 considered in designing internal control, the precise measurement of costs and benefits usually is not possible. Custom, culture, and the corporate governance system may inhibit fraud, but they are not absolute deterrents. An effective control environment, too, may help reduce the risk of fraud. Fo
37、r example, an effective board of directors, audit committee, and internal audit function may constrain improper conduct by management. Alternatively, the control environment may reduce the effectiveness of other components. For example, when the nature of management incentives increases the risk of
38、material misstatement of financial statements, the effectiveness of control activities may be reduced.9. Balancing Risk and Control Risk is the probability that an event or action will adversely affect the organization. The primary categories of risk are errors, omissions, delay and fraud In order t
39、o achieve goals and objectives, management needs to effectively balance risks and controls. Therefore, control procedures need to be developed so that they decrease risk to a level where management can accept the exposure to that risk. By performing this balancing act reasonable assurance” can be at
40、tained. As it relates to financial and compliance goals, being out of balance can cause the following problems:Excessive controlsExcessive controlsLoss of assets, donor or grantsIncreased bureaucracyPoor business decisionsReduced productivitynoncomplianceIncreased complexityIncreased regulationsIncr
41、eased cycle timePublic scandalsIncreased of no-value activities In order to achieve a balance between risk and controls, internal controls should be proactive, value-added, and cost-effective and address exposure to risk.11. Conclusion The concept of internal control and its aspects in any organizat
42、ion is so important, therefore understanding the components and standards of internal controls should be attend by management. Internal Control is a major part of managing an organization. Internal control is an accounting procedure or system designed to promote efficiency or assure the implementati
43、on of a policy or safeguard assets or avoid fraud and error. According to custom definition, Internal Control is a process affected by an entitys board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the following categ
44、ories namely. The major factors of internal control are Control environment, Risk assessment, Control activities, Information and communication, Monitoring. This article reviews the main standards and principles of internal control and described the relevant concepts of internal control for all type
45、 of company.A Clear Look at Internal Controls: Theory and Concepts内部控制透视：理论和概念 Hamed Arad (Philee) 哈米德阿拉德（Philae） Department of accounting, Islamic Azad University, Hamedan, Iran 会计系，伊斯兰阿扎德大学，哈马丹，伊朗 Babak Jamshedy-Navid 巴克Joshed -纳维德哈尼 Faculty Member of Islamic Azad University, Kerman-shah, Iran 学院会
46、员伊斯兰阿扎德大学，克尔曼伊朗国王，伊朗 Abstract : internal control is an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error. Internal Control is a major part of managing an organization. 摘要 ：内部控制是会计程序或控制系统，旨在提高效率或保证一个执行政策
47、或保护资产或避免欺诈和错误。内部控制是组织管理的一个重要组成部分。It comprises the plans, methods, and procedures used to meet missions, goals, and objectives and, in doing so, support performance-based management. 它包括计划、方法和程序使用，以满足任务，目标和宗旨，这样做是用于支持基于业绩的管理。Internal Control which is equal with management control helps managers achieve desired results through effective stewardship of resources. Internalcontrols should reduce
陕公网安备 61072602000132号 违法和不良信息举报：0916-4228922