Internal Control System in an Organization

Internal Control System in an organization:

The Standard on Auditing (SA) 315: “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment”, defines the internal control system as-

“The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regards to reliability of financial reporting, effectiveness and efficiency of operations, safeguarding of assets and compliance with applicable laws and regulations.”

Pre-Requisites for Institutionalization of Internal Control System:

Any organization must have the following requisites before the internal control system is effectively and properly institutionalized. These terms are-

  • Organizational Objectives: After conducting a fair assessment of the strengths and weaknesses in the company, a long term and short term aims and objectives of the organization are to be formulated based on the assessment. If well-defined objectives are absent, this may lead to internal control system that is loose and the activities will be performed in haphazard manner.
  • Organizational Structure: A well-organized structure must be followed in the entity and everyone must be aware about whom they have to report to for their functions and work or who will report to them. They must know their authorities, key result area, functions etc.
  • Operating Policies: When the operating policies of the entity are impractical or unclear, then its implementation will be weak and anyone can misuse them. Therefore for effective internal control system the policies must be strengthening, strong and applicable.
  • Standard Operating Procedure: The organization’s different standards and operating procedures must be documented and clearly stated. It should state as to how all the activities must be performed.

Tools and Techniques of Internal Control System:

To install well-defined and systematic internal control system many tools and techniques have been provided. These techniques are-

  • Planning and Budgeting: A detailed budget system and action plan is to be formulated as the first step to install internal control system in the entity. At regular intervals, these actual plans are to be compared with the variances and must be analyzed thoroughly. The budget must be practical as per the organization’s goals and must be achievable.
  • Internal Audit: This is one of the best methods or technique to monitor and control the operations of an entity. The internal auditor’s appointed for providing Internal Audit Service can be in house or from external sources. Both can be really beneficial for the company in their own ways. When the company decides to appoint an auditor from outside the organization, these are the advantages that it might enjoy during the internal audit-
  • Coast effectiveness or cost saving
  • Assurance of independence of auditor
  • Experience from other organizations and industries
  • Management Information System: A time tested technique that has been very effective in controlling the activities of the organization is the Management Information System (MIS). The figures must be correct and reliable for effectively applying this method. It should be based on objectives and on-timely completion of activities.
  • Informal Grapevine: The management of the company must carefully listen to all the feedbacks that it receives from the informal and various sources. It their duty ensure and verify its correctness and check whether the information is reliable or not. An action must be taken accordingly to put the internal control system in place.

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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