An internal control system is a set of policies and procedures established by the management to protect assets and ensure the effectiveness of its operations. The purpose of the internal control system is to ensure that businesses operate efficiently, its assets are protected, frauds are detected, errors in records are avoided, records are kept accurate, accounting and financial information are completed in a timely manner.
The internal control system consists of five main components: Controlled Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring.
A controlled environment is a set of processes, structures, and standards of performance that underpins management and control in a business. Creating an effective controlled environment in a company requires the following factors:
1. Individuals understand their responsibilities
2. Define and assign authority and responsibility in management
3. Knowledgeable, conscious and determined to do the right thing
4. Full technical ability
5. Positive management and leadership and ethics
6. Unique single standard for performance in business
7. Valued by integrity, personal and professional standards by management
8. Promote internal control in the business by management
9. Establish and communicate effectively through the development of written policies, procedures, codes of conduct and standards
10. Employees are committed to adhering to the principles, procedures, ethics and standards of conduct
The Board of Directors and senior management have a role to play in creating a controlled environment. For effective management of human resources in a business, there must be a number of policies and procedures, such as: Hiring, Counseling, Orientation, Promotions, Training, Compensation, Evaluations. In the event that an employee fails to comply with business policies and procedures or behavioral standards, the business must take appropriate disciplinary action to maintain an effective monitoring environment. In order to create a good and controlled environment, each business unit should have the following points:
1. Provide written procedures: Ensure that the policies and procedures of the Administration and Finance section have staff manuals, purchasing manuals, staff memoranda, and policies for handling key activities in its section.
2. Define responsibilities: Employee’s responsibilities, performance standards, control procedures, and report structure should be clear.
3. Be awareness of Policy: Make sure employees are well aware of the business policies and procedures related to their job responsibilities.
4. Speak openly about ethics: Discuss ethical issues with employees. If employees need additional guidance, there is a standard of business ethics. Make sure employees adhere to the conflict of interest policy and highlight potential conflicts of interest.
5. Proper selection and training: Ensure there is a clear job description, have a clear internal control responsibility, interpret correctly according to the level of ability, knowledge, skills and experiences required, hire a qualified staff and have a proper training.
6. Fair and standardized assessment: Ensure that employee performance appraisals are conducted regularly. All good performance should be valued and received positive recognition.
7. Discipline required: Ensure that appropriate disciplinary action is taken when the employee does not adhere to the principles and procedures or standards of conduct.
These points may be beneficial in order to have an efficient management.
By: Mr. Yousan Seng