Internal Control

What is Internal Control in Accounting?

Internal Control in accounting refers to the process in which the different rules, policies or the procedure are adopted by the company for the purpose of ensuring the correctness of the information pertaining to the accounting and finance, safeguarding the different assets of the business, promoting accountability in the business and preventing the occurrence of the frauds in the company.

Example of Internal Control in Accounting

Let’s take an example of internal control for better understanding.

• An Example of internal control can be in terms of protection of the cash, as the protection of the cash of the company is a must as compare to the other assets as they can tamper more easily. Out of the total assets of the company, cash is the most crucial asset which can be easily stolen in the company especially by the person who is managing it. Hence, it should be applied by the company for the protection of cash of an entity.
• For this company can place different types of internal control in the cash department. First of all, it company can call for the system of segregation of duties in the cash department, in which the duty of receiving the cash from the customer can be given to the person different from the person who records the receipt of cash in an accounting system. It means allotting two different employees in the cash department for the two different types of activities.
• Furthermore, an entity can put more internal control systems especially the company working on a large scale, where they can appoint more employees within the chain of the cash working like separate employees for cash collection, for cash deposition in the bank and for record maintenance in the accounting system.
• With the help of this simple segregation of the duties of every employee, they will perform their task properly and individually which will eventually help in preventing frauds and errors as a single person will not be able to steal the cash and record fewer amounts of cash receipts in an accounting system and even if anyone would try to do so, then the other person can identify the same and report to the management of the company.

Advantages of Internal Control

The different advantages are as follows:

• It ensures the proper accounting of all the transactions of the company.
• If there are proper internal controls being placed in the organization, then it will lead to the smooth working of the organization and optimum utilization of the resources of the company thereby reducing the misuse of the resources.
• It helps in preventing the financial irregularities arising in the business and if any arises, then if the proper internal controls are in place then it helps in detecting them and correcting them as soon as possible.
• They help the business in implementing the policies of the management in an efficient and effective manner and thereby helping in achieving the various goals of the business.
• With the help of the internal control in the organization, the work of the staff can be regulated in the proper and the scientific manner through the way of division of work properly among the different staffs which leads to the efficient and effective working of staffs and puts the moral pressure on them.
• If the proper internal control system is in place in the company, then the chances of the non-compliances of the different statutory laws reduce thereby reducing the chances of the different lawsuits because.

Limitations of Internal Control

• As there is involvement of the human in placing the internal control in the company, there are chances of the human error in doing so. Many times the person who is in charge of implementing the control does not get the proper understanding of the control and its purpose or he forgets to follow the particular step, which might not fulfill the purpose of the whole of the internal control. In these situations, it becomes hard to put in place the proper internal control system in the organization.
• Many times system of internal control is not designed properly where there is insufficient segregation of the duties and people are allowed to interfere in the work of others. In those cases, it negatively affects the performance of the staff.
• Many times company has to incur the huge cost for the implementation of the proper internal control in the organization which becomes problematic for the concerns especially those who are having the small scale business.

Important Points

Some important points are as follows:

• Process in which the different rules, policies or the procedure are adopted by the company for the purpose of ensuring the correctness of the information pertaining to the accounting and finance, safeguarding the different assets of the business, promoting accountability in the business and preventing the occurrence of the frauds in the company is known as the internal control.
• With the help of the internal control in the organization, the work of the staff can be regulated in the proper and the scientific manner through the way of division of work properly among the different staffs which leads to the efficient and effective working of staffs and puts the moral pressure on them.
• There is a different limitation, which includes chances of the human error as there is involvement of the human in placing the internal control in the company, insufficient designing of the internal control, huge cost involvement, etc.

Conclusion

Thus, in case of the internal control, the company adopts different rules, policies or the procedure with the motive of safeguarding the different assets of the organization, promoting the operational efficiency, checking of the accounting data, and following the different policies and procedures as prescribed by the management managerial of the company.

This has been a guide to what is internal control and its definition. Here we discuss an example of internal control in accounting along with advantages and limitations. You can learn more about accounting from the following articles –

• Compare – Internal Audit vs External Audit
• What is Internal Audit?
• List of Audit Procedures
• What is Accounting Controls?