Components of Good Internal Control System for Small Companies

Internal Control can be defined as a process to assure the objectives of the organization. It helps in increasing the effectiveness and efficiency of the operations of the company, compliance with the rules and statutory regulations and reliability of the financial reporting. It involves managing and controlling the internal as well as external risks in the company.

Small Company Registrations are at higher risks challenging and threating their existence and survival. Therefore, having an advance and good internal control system in the organization becomes one of the utmost priorities.

A good internal control system must have the following components for better risk management in the small company registration-

  • Personnel in management: The management personal must be fully committed to perform all the key procedures involved in the internal controls. He must perform his duties diligently, must be of high ethical values and integrity. The character of the management is the one important thing that shapes the control environment of the small company registration.
  • Monitoring control activities: One of the primary responsibilities of the management of the company is to monitor. Small company registration and its management must perform control checks on daily basis. This can help in providing valuable feedbacks on the efficacy and accuracy of the operations, accounting system and internal control measures in the entity.
  • Key controls: The lacking of segregation of duties can be overcome by performing the key controls by the management personnel. These control checks may include inspecting certain selected transactions along with supporting documents, overseeing the periodic counts of inventories, reviewing bank statements, reconciliation statements and reports on accounting system.
  • Governance Board: It should have more oversight involvement and hold on the activities of the company. Monthly, organizational level controls can also be performed by some of the members in the board. These may include inspection, regulatory checks and approval of the documentation supporting different activities.
  • Maximization of effectiveness and efficiency: This can be achieved by including the activities that been tailored and filtered as per the nature, size and complexity of the business entity. As the procedures and policies of the small company registration are usually informal, it is the duty of the personnel in the management to frequently contact the accounting personnel to communicate the internal control measures.
  • IT system: The information and technology system of the small company registration limits the risk of fraudulence, forgery and error in the activities of the company. It helps in producing accurate and systematic financial reports. While using the accounting software in the organization it must be ensured that it consists, essential application controls, processing controls, standardized reporting formats and passwords.

Usually, it is the duty and responsibility of the auditor performing the internal audit in the small company registration to check and assure the efficiency of the internal control measures in the entity. They have to review the system and the risk management for betterment of the organization. The auditor hence, uses the following tools to get a better picture of the system and for properly evaluating the same-

  • Flow charts: It is the graphical representation showing the each and every part of internal control system of the company.
  • Questionnaires: The auditor usually prepares a comprehensive set of questionnaire for reviewing internal control system. This series is issued to the client, who is required to get these filled up by his/her staff and employees.
  • Checklist: It contains a set and series of instructions and questions. The members of the auditing staff are required to follow these and even answer all the questions. The spaces against the instructions are initialized by the auditor once he completes them.
  • Narrative record: It is the description of the system found in the operations of the small company registration that is completely exhaustive. It is prepared by the auditor.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.
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