Internal Controls in a Company

Internal control is a process implemented by an entity's board of directors, management, and other personnel to provide reasonable assurance that the organisation will meet its operational, reporting, and compliance objectives.

This includes the integration of various things such as activities, plans, attitudes, policies, and the efforts of an organization's people working together.

Need for internal controls

The management needs to establish a strong internal control framework. Internal control is another aspect of financial management and financial statement auditing that requires a high degree of professional judgment.

Management establishes internal controls for three key reasons:

• Reliable financial reporting
• Efficient and effective operations
• Compliance with rules and regulations

In establishing internal controls, management has to commit money, human resources, and technology. More the policy and procedures the greater the resources required to establish and implement an internal control framework in a company. Since the management cannot eliminate nor ignore internal control risk, they will undertake a cost/benefit analysis that helps them establish appropriate internal controls.

Characteristics of a good internal control system

A good internal control system should:

• Report reliably so that it helps in making the right decisions
• Safeguard the company’s assets from theft and accidents
• Prevent waste and inefficiency
• Detect and prevent fraud

Process for establishing internal controls

First, the management has to identify and list the main risks in the business. Then they can come up with mechanisms to prevent these identified risks.

For instance, let us take sales and collection as an identified risk in a hotel. Firstly, all sales must be recorded. How does the management ensure this happens? They can put in place a system to reconcile the sales to the reservations. They can also include a daily reconciliation of sales to the occupied rooms. A camera monitoring the front desk and a supervisory manager who checks the sales details are other valuable additions to establish internal control.

Internal controls are required in the restaurant where food and wine are served and cash is used for payments. Inventory management and control are also important. A manager can check invoices, void transactions, and daily inventory checks of the wine and liquor. Numbered order slips help account for all sales during each shift. These controls will help ensure the accuracy and completeness of sales and catch any fraud quickly.