Internal Control Systems - Coursework Example

Table of Contents: Executive Summary Meaning of internal control systems 2) Purpose of Internal control system 3) Different control system in the organisation: 4) Review of effectiveness of existing control systems: 5) Recommendation for improvement 6) Conclusion Internal Control is Fundamental to Organization Effectiveness Executive Summary: This case study analysis is objected to provide an overview of various internal control systems in organisation with their effectiveness in meeting the objectives and goals of organisation. The meaning and purpose of internal control system in organisation are analysed in this case study. Analysis of different control system adopted by the organisation along with its effectiveness in meeting the organisational objectives are carried out for providing recommendations to reduce the operational defaults in control system of the organisation. Report to Line Manager: 1. Meaning of internal control systems: Internal control is the techniques adopted by an organization to help achieve organizational objectives in a cost effective manner. Internal control system involves the components of internal control which facilitate the proper functioning of the organization. According to the definition given by French Institute of Chartered Accountants in 1977, “Internal control is the set of security measures which contribute to the control of a company. Its aim is to ensure, on the one hand, the security and safeguard of assets and the quality of information, on the other hand, the application of instructions given by Senior Management, and to encourage improvements in performance.” (The Internal Control System: The Context. 2007). 2. Purpose of internal control system: Internal control system contributes to the achievement of the organizational objectives by providing effectiveness and efficiency in operations and by improving the reliability of internal and external reporting in compliance with applicable laws and regulations and internal policies. “Internal control, by definition, is a comprehensive, fully integrated approach to assessing, limiting, monitoring and controlling any risks that impact on an agencys capacity to perform against its corporate objectives.” (How can Risk Management and Internal Assessment Help Me. 1997). Internal control system is essential for ensuring regular functioning of the business firm. Internal controlling helps the managers to ensure that actual activities conform to the planned activities. It implies measurement of actual performance comparing it with the standards set by plans and correction of deviations to assure attainment of objectives according to plans. It is with the intention to ensure satisfactory performance of organizational personnel. “Implementing an internal control system is important to the effectiveness and efficiency of a company’s financial and business policies. Internal control systems are designed to eliminate or decrease business risks associated with errors and inconsistencies.” (Beverly 2009). An effective control system should reflect the organizational needs. It must be forward looking and should have the capability of reporting deviations promptly. In critical points, exceptions have to be clearly specified by the controlling system. Other features of an effective control system is that it should be objective, definite and determinable, flexible, economical, simple, motivating, and reflecting organizational pattern. Internal control system is intended to ensure maximum productivity and effectiveness in organizational performance by correcting organizational defaults in time and restricting its regular occurring. It is a crucial factor for the efficiency and performance improvement of organization. Risk management and internal control are interrelated. “Internal control is a set of procedures included in the operations of a business unit. These procedures are part of the management function of any investment firm. All personnel however need to be involved in internal control for it to be effective.” (Financial Supervision Authority: Introduction. 1999). 3. Different control systems in the organization: In our organization, different control systems are adopted to ensure efficiency in different level of activities. The internal control system adopted by the firm can be classified into two different categories such as budgetary and non-budgetary control systems. In budgetary control system budgets such as cash budget, capital budget, sales budget, operating cost budget, production budget, production cost budget, labour budget, raw material budget, production overhead budget and master budget are prepared and analyzed. The non- budgetary tools applied in the organizational control includes cost control by preparing cost accounting, standard costing, and break even point analysis. Business and managerial statistics, internal audit, external audit, production control, inventory control, personal observations, performance gap analysis and reporting are other non-budgetary devices used in the organization for internal control. 4. Review of effectiveness of the existing control systems: Internal control plays a key role in the well functioning of organization by keeping the organizational structure and resources in proper way. Internal control allows the managers to supervise work flows and other business processes in adequate manner. It helps to manage various business procedures and measure the effectiveness of business processes regularly to check the organizational performance. “Four components relate to the design and operation of the system of internal control: control environment, risk assessment, control activities, and information and communication. The fifth component — monitoring — is designed to ensure that internal control continues to operate effectively.” (Monitoring as a Component of Internet Control Systems. 2008, p.1). The control systems help to maintain the operational cost under control. Malpractices of employees reduced to a great level. The risk assessment and control becomes possible through this system. It helps to maintain the accountability and responsibility of organizational personnel. The control systems help to evaluate the effectiveness of ongoing operations from a control perspective. Budgetary control is a technique of managerial control through preparation and analysis of budgets on various operations. Budgetary devices are effective tool for organization’s internal control. Performance gap analysis helps to measure the accrual performance by comparing it with planned performance. In this tool, analysis of the factors contributing performance gap helps to implement corrective measures in time. Internal control system adopted by the organization is effective for ensuring the efficiency of the organization in meeting its objectives and goals. The implementation process is affected by various factors such as lack of responsibility of managerial personnel for providing adequate direction and motivation to the employees for improving their efficiency and skills. Even though the organization finds it difficult to achieve its targeted performance efficiency there is internal control system in the organization. The cost of production is not under control and operational efficiency has not reached the targeted performance level. So the existing internal control must be redefined to become more compatible with the current business environment. “The primary responsibility for the development 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.” (Internal Control Systems: Parties Responsible for and Affected by Internal Control. 2008). 5. Recommendations for improvement: The defaults relating to the effective implementation of the control systems of the organisation can be corrected by applying direct involvement of the top level management on various cost control measures. The financial reporting system of the organisation should be strengthened by applying internal audit in the organisation on a periodical basis. The preparation of budgets relating to each department should be carried on by groups consisting of well efficient personnel in each department. The cost analysis of the organisation also should be strengthened by effectively utilising the cost accounting and standard costing techniques in the organisation. To get maximum effectiveness in the internal control systems, organisation should have to apply additional control techniques such as periodical review of the financial and cost reports. It will be helpful for ensuring the effectiveness of the control system to attain the targeted performance in the financial and cost centres. Participation of organizational personnel has to be ensured by the management for the effective implementation of control systems. Direction and motivation to the organisational personnel in various departments are required to be provided by the management for developing their trust and reliability towards the organisation. The Board of Directors and Internal auditors have to perform their duties well in order to attain the benefits of internal control systems. Involvement of top management in the control system must be ensured. “Continuous monitoring of the investment firm’s internal control in respect of its efficiency is necessary. Monitoring significant risk-taking must be an integral part of the investment firm’s daily operations. Business operations also need to be regularly monitored.” (Financial Supervision Authority: Monitoring Operations and Correcting Deficiencies. 1999, p.8). 6. Conclusion: The organizational control system adopted by the manufacturing firm has not achieved its objectives fully. It should be carefully re-implemented for attaining the targeted efficiency improvement. Inadequate and inefficient internal control system in organisation will result in financial loss as it reduces the operational efficiency and increases the operating costs. The targeted efficiency improvement can be ensured by effective implementation of different control systems. Authority and responsibility of each personnel in the organisation has to be clearly defined and implemented in the organisational control mechanism. Along with the existing control systems, use of alternative control procedures can be considered by the organization. The Board of Directors and internal auditors are required to take adequate alternative control procedures in order to exploit the benefits of internal control procedures in the organization. Proper risk management also has to be adopted by the organization. By following these techniques, the manufacturing firm can ensure effective organisational operational and cost control in their premises. Bibliography BEVERLY, Apryl. (2009). Guide to Internal Control. [online]. Business.com. Last accessed 17 January 2009 at: http://www.business.com/directory/accounting/auditing_and_fraud/internal_audit/internal_control/ Financial Supervision Authority: Introduction. (1999). [online]. Capitals Markets Department. Last accessed 17 January 2009 at: http://www.rahoitustarkastus.fi/NR/rdonlyres/393B1472-F76C-4AE2-B5F8-6010F3B84140/0/20328.pdf Financial Supervision Authority: Monitoring Operations and Correcting Deficiencies. (1999). [online]. Capitals Markets Department. P.8. Last accessed 17 January 2009 at: http://www.rahoitustarkastus.fi/NR/rdonlyres/393B1472-F76C-4AE2-B5F8-6010F3B84140/0/20328.pdf The Internal Control System: The Context. (2007). [online]. P.2. Last accessed 17 January 2009 at: http://www.amf-france.org/documents/general/7636_1.pdf How can Risk Management and Internal Assessment Help Me. (1997). [online]. Risk Management and Internal Control. Last accessed 17 January 2009 at: http://www.sgb.gov.tr/en/Internal%20Control/Risk%20Management%20and%20Internal%20Control%20Guidelines.pdf Internal Control Systems: Parties Responsible for and Affected by Internal Control. (2008). [online]. Answers.com. Last accessed 17 January 2009 at: http://www.answers.com/topic/internal-control-systems Monitoring as a Component of Internet Control Systems. (2008). [online]. Coso. P.1. Last accessed 17 January 2009 at: http://www.coso.org/documents/VolumeII-Guidance.pdf Read More