Internal Control In The Business Organizations †MyAssignmenthelp.com

Question: Discuss about the Internal Control In The Business Organizations. Answer: Introduction Auditing refers to the process of systematic and independent inspection of various financial accounts of the companies in order to ascertain the fact that they are developed and recorded in the fair and true manner (Arens, Elder Mark, 2012). In the process of auditing, Internal Control of the organizations is considered as a crucial aspect. In the language of auditing and accounting, internal control refers to the process to assure that all the accounting objectives of the companies are properly achieved. Thus, it can be said that internal control is responsible for maintaining the operational effectiveness and efficiency of the organizations. Hence, it is clear that effective implementation of internal control system has utmost importance in the companies (Vijayakumar Nagaraja, 2012). The main objective of this report is to analyze and evaluate various aspects of internal control in the business organizations. The later part of this report also focuses lights on the major limitati ons of internal control within the organizations so that effective remedial strategies can be developed. Literature Review: Five Components of Internal Control It is mentioned in the above part that internal control has major importance within the organizations. In this context, it needs to be mentioned that there are five major components of internal control that have effects on the external audit of the companies. These five major components are discussed below: Control Environment: Control environment can be considered as the attitude of management and the employees for the needs of establishing internal control. Two of the major components of control environment are governance and function of the management. It is the responsibility of the management to establish effective control environment based on the organizational principles, standards and policies. Implementation of effective internal control helps the external auditors in understanding the philosophy and nature of the management as it is largely helpful in audit operations (Chen, Shih Ma, 2013). Risk Assessment Process: It is a major role of internal control to identify major material misstatements in the financial statements of the companies. In this process, management of the organizations has an important role to play as they have the responsibility to ascertain the risks with the help of internal control. Identification of major material risks by the management helps the external auditors as the major risks are already identified (William Jr, Glover Prawitt, 2016). Information and Communication: This component implies that the financial information regarding organizational control is required to be communicated with the management in an effective way. It is required for the external auditors to gain understanding about the information and communication in the business organizations. Effective information and communication system largely helps the external auditors. Control Activities: Control activities refer to the use of effective accounting system, information technology and other systems in order to increase the effectiveness of internal control system within the organizations. With the help of these activities, the external auditors of the companies are able to understand the nature of authorization of the management. Apart from this, all these activities play a crucial role in protection and securing confidential financial information for the external auditors (Al Sawalqa Qtish, 2012). Monitoring: Monitoring is considered as a crucial part of internal control as it helps in the overall assessment of internal control effectiveness. It needs to be mentioned that the report of monitoring process is essential for the external auditors as this report helps the external auditors in identifying the loopholes in internal control. For this reason, this is a major part of internal control (Bruynseels Cardinaels, 2013). Benefits of Strong Internal Control It needs to be mentioned that the external auditors can avail major opportunities from the successful implementation of strong internal control. Some of the major benefits are discussed below: Reliable Financial Reporting: One of the major benefits of internal control is that it helps in the generation of reliable financial reports for carrying on various activities of external audit. With the help of effective internal control system, the financial managers of the companies are able to get true and fair financial information so that they can develop error free financial reports for the companies. External auditors carry on the audit operations by considering these financial reports (Abbott, Parker Peters, 2012). Maintaining Compliance: It is the responsibility of the internal control of the companies to ascertain the fact that all the accounting and financial works are done according to the correct principles and standards. At the time of recording the financial statements, financial managers are required to comply with the regulations and principles of accounting standards. This particular aspect reduces the work pressures from the external auditors, as they do not have to do the compliance check (De Simone, Ege Stomberg, 2014). Reliability: Another major benefit of internal control is that it helps in improving the reliability of accounting and financial information. Confidence is a major aspect in financial aspects. Thus, the external auditors of the companies need to have confidence on the provided financial and accounting information by the management of the companies. In the presence of effective internal control, external auditors can rely upon the provided financial as well as accounting information by the management (Berber et al., 2012). Operational Efficiency: The implementation of effective internal control helps in increasing the overall efficiency of various business operations of the companies. For this reason, the external auditors do not have to face many problems while conducting the audit operations. These are the major benefits of the implementation of internal control for external auditors (Hoitash, Hoitash Johnstone, 2012). Enhancing the Performance of External Auditors Earlier discussion shows that risk assessment is a major part of internal control and risk assessment plays an integral part in enhancing the performance of external auditors. As todays business environment is becoming more complex, it has become necessary for the process of risk assessment to become more comprehensive and rigorous (iaasb.org, 2017). For this reason, it has become more crucial for the external auditors to gain understanding about different aspects of management and accounting. This process helps the auditors to identify and assess the risk of material misstatement in a more effective way. Data analysis is considered as another major aspect of internal control. With the help of data analysis, external auditors become able to gain better understanding about various risks of the auditing entity (iaasb.org, 2017). Data analysis makes it able for the external auditors to test large population of data; because of this, external auditors become able to assess the audit risk s in the earlier stages. Thus, from the above discussion, it can be seen that risk assessment helps the auditors to gain clear understanding about the audit entities and their various operations. In this way, they become able to assess the risk of material misstatements in a more effective way. Case Example In this case, the example of Department for Work and Pensions (DWP) in United Kingdom can be mentioned. According to Mark Repley, the head of internal audit of DWP, the internal audit process is highly associated with the program life cycle of various projects of DWP. He has also stated that the internal audit of DWP provides continuous reports of periodic audit engagement activities along with other internal audit programs (nao.org.uk, 2017). Thus, from the example of DWP, it can be seen that internal control plays an important part in the overall development of various processes of companies. Limitations of Internal Control In spite of so many advantages, there are some major limitations of internal control. They are discussed below: Collusion: Collusion in internal control can be seen when two or more people are responsible for keep watch on various procedures of internal control. Human Error: There are many instances when people responsible for internal control make mistakes. This can be considered as a major limitation of internal control. In this aspect, it can also be happened that the person responsible for internal control does not know the use of various computerized system in internal control (Mnih et al., 2015). Management Override: It can be happened that a person from management who is responsible for internal control overrides a major aspect of internal control for his/her personal advantage. Thus, it is a major limitation of internal control. Missing Segregation of Duties: Under proper internal control system, it is required to segregate duties among all the members of the management. However, lack of segregation of duties can be considered as a major disadvantage of internal control. Lack of Management Support: Sometimes it can be seen that management does not provide enough support to the internal control of the companies. This is another major limitation of internal control (Lam, 2014). Conclusion The above discussion shows that internal control is an important aspect in the process of auditing. According to the above discussion, there are five major components of internal control having effect on external control; they are control environment, risk assessment, technology and communication, control activities and monitoring. All these factors have major effects on various operations of external audit. 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