Organization of an internal control system in an organization: creation, purpose, requirements and analysis

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The owner of any economic object always cares about the quality of the organization of his economic activity. Any profitable enterprise carries a potential profit for its owner. What competent entrepreneur would not be interested in the conditions of functioning of his own offspring, bringing him such serious income? Probably, you need to be a fool to let everything take its course and assume that it will always be so, that the work in the organization will proceed as planned and will bring the same positive financial results forever, without delving into and without interfering in the labor process of your subordinates. Precisely because every businessman in his right mind and with an objective attitude to the management of his company is afraid of losing his profits and one day becomingbankrupt, he introduces a system of internal control of the organization. What it is? What does this system give? How is it organized? And what are the goals? First things first.

What is the internal control system in an organization

A sample of any exemplary business entity is an enterprise that uninterruptedly carries out its economic activity and fulfills the main condition for its existence - it makes a profit, regularly increasing it. The owner of the company always directs all the efforts and investments only to what makes his organization even stronger and more powerful, expanding the sources of return in the form of income. Of course, any owner wants his company to function smoothly. And he understands that for this you need to take appropriate action. This is where the global need for the organization of the internal control system of the organization arises. Here one can clearly see the need to form within the enterprise such an apparatus for monitoring and identifying shortcomings in the management process, which will signal to the owner about any violations and inconsistencies. What should be such a device?

The internal control system in the management of an organization is a set of methods for tracking, monitoring, checking, evaluating and analyzing all the procedures and business processes taking place at the enterprise that are directly related to the results of the economic activity of the company as a whole. In other words, these are special employees, specific methodsresearch, a list of analytical equipment and related technologies, which together give the very controlling effect that a business owner wants to be provided with. He needs such controlling in order to protect himself from dishonest subordinates or poor-quality performance of their duties, which in the end can affect the financial result of the enterprise as a whole. But how is this process organized?

The organization of an internal control system in a company is the formation of such a favorable ground for the functioning of regulatory authorities in conjunction with their access to technical equipment and all the necessary information of a business entity that can provide high-quality control in monitoring the work of workers and their direct tasks in accordance with their job descriptions. Simply put, the creation of a controlling apparatus at an enterprise involves the performance by specialist auditors of checks in all functional areas of the company.

Goals

A competent businessman never does anything aimlessly, therefore, he thinks over every detail of his action, innovation, order or order given through the director and implements it into the business activities of his enterprise to achieve a specific result. Accordingly, it is the same with the control apparatus. There are four main objectives of the internal control system in the organization, which guide any owner in order to avoidproblems occur:

1. Checking the effectiveness of economic activity. It implies the need to monitor and monitor the economic transactions carried out at the enterprise in order to identify possible deviations and suppress them.
2. Information security. It involves the organization of the transparent functioning of the accounting department in providing reliable, objective, complete and timely reporting to management and higher authorities.
3. Suppression of theft and illegal actions of employees. This refers to tighter control over possible incidents of money laundering and scams by employees within the enterprise.
4. Compliance with the regulations. Each state unit in the personnel apparatus must strictly follow the internal regulatory work schedule.

Trying to protect himself and the fruits of the functioning of his company in the form of revenue, its owner sets himself specific goals. These goals are successfully achieved thanks to the effective organization of the internal control system in the organization.

Structure

The mechanism of controlling at any enterprise is carried out through the hierarchical subordination of controlling bodies. At each site there are bodies responsible for carrying out monitoring and verification activities. How does an example of an internal control system in an organization look like in terms of structural and hierarchical subordination?

Of courseMuch depends on the form of government at the enterprise. With a small firm and a staff of three or four people, everything is clear, there is nothing special to control, this is done by the immediate supervisor. But in large enterprises, everything is different: the larger the company, the more relevant internal control measures should be distributed to its structural departments. For example, the organization of internal control in corporate systems is carried out in the context of several structural blocks:

• The first block is the board of directors, the main and unshakable administrative apparatus, which is centrally managed and controlled.
• The second block involves the branching of control from the board of directors into two main bodies in the form of the management apparatus and the audit committee.
• The third block - provides for the division of control from the management apparatus to the heads of all departments existing in the company, who, in turn, control the direct activities of their subordinates in each department.
• The fourth block - involves the dispersal of the controlling responsibilities of the audit committee into the risk management unit and the internal control unit.

Based on the block structuring of control bodies in the company, we can conclude that there are two directions in corporate forms of government: these are separate structural bodies within the enterprise and heads of departments who monitor their subordinates. Often this is how the organization of the system of internalcontrol in the enterprise.

The structure of supervision of financial institutions looks a little different. The internal control system of a credit institution provides for six main sources of dissemination of relevant measures at certain levels of the hierarchy:

• management bodies of a credit institution;
• head and his deputies;
• chief accountant and his deputy;
• revision commission or auditor rolled into one;
• special control units;
• other structural units of the control bodies of the credit institution.

Views

Classification of types of internal oversight is quite multifaceted due to the large number of features of the unit. Thus, the creation of an organization's internal control system provides for several branches in the main areas.

In order of implementation:

• administrative;
• administrative;
• financial;
• technological;
• legal;
• accounting.

According to the form of submission:

• actual;
• computer;
• documentary.

Temporally:

• preliminary;
• current;
• next.

By coverage:

• full and partial;
• solid or selective;
• complex or thematic.

Methods

In addition to the listed types of supervision, the audit procedures carried out at the enterprise can be manifested in the implementation of various methodological approaches to verification. Therefore, the organization of an internal control system at an enterprise involves the use of a set of three main methodological areas.

General methods:

• Audit - involves the control of accounting and financial reporting.
• Monitoring - involves studying the correctness of the procedures performed in specific areas in specific departments of the enterprise.
• Revision - carried out through verification manipulations with the documentation.
• Analysis - calculates specific economic indicators and compares them with the norm values.
• Thematic check - performed on the subject of something specific, for example, checking the cash register and cash.
• Official investigation - occurs when some non-compliance with the regulations or an offense of a materially responsible person is revealed.

Documentary controls:

• Legal assessment - refers directly to the powers of the legal department at the enterprise with verification activities regarding contracts and other documentation.
• Logical control - is performed to check the profitability of ongoing business operations, reflected in the relevant documents.
• Arithmetic verification - manifests itself in a specific miscalculation and comparison of indicators in documents with real onesdata.
• Counter check - involves raising the primary for a specific period and its analysis: this includes waybills, tax invoices, adjustments to tax invoices and more.
• Formal verification - provides control over the availability of mandatory documents on the basis of which certain operations were carried out.
• Comparative check - reveals inaccuracies and inconsistencies in digital, summary, equivalent data.

Techniques of actual control:

• Inventory - provides for the verification by the internal control system of accounting in the organization of the presence and recalculation of such property as fixed assets, tangible and intangible assets, cash on hand, non-cash finances in bank accounts, etc.
• Expertise - is carried out by attracting an expert or a staff specialist in a specific issue of a certain focus.
• Visual observation - involves monitoring the employee and his work activity from the outside. For example, this is how a senior accountant can observe the performance of his duties by an ordinary accountant.
• Control measurement - characterized by a sudden decision to check for quantitative or qualitative reproduction of a particular operation in the enterprise in order to compare it with the norm.
• Analysis of management information - predetermines the study of orders, orders, decrees of an internal nature and verification of the results of their implementation.

Functions

The organization of an internal oversight system in an organization of any form of ownership provides for the performance of specific functions by the relevant bodies. After all, each controlling operation involves the achievement of a certain result. The global result should be the uninterrupted operation of the enterprise with a regular and stable income. And it seems possible to achieve it only when performing a set of strategic functions. Here are some of them:

• Monitoring of the company's business activities and its external environment - includes tracking market trends, changes in demand needs, as well as competitive facilities and their policies.
• Development of strategic directions of the company's activities - provides for the achievement of the main goal of the company through tactical steps in operational and economic activities.
• Creating a risk assessment and management system - the regulatory authorities of any enterprise should have an idea of what adverse factors threaten it within its activities.
• Evaluation of investment and capital investment projects - internal control should carry out work to assess the productivity, rationality and profitability of projects invested by it.

Moving from general to particular, we can single out the current functions of the internal accounting control system in the organization as fundamental information data for conducting high-quality internalfactory inspections:

• study of current accounting systems;
• assessment of the productivity and profitability of these systems;
• financial analysis and accounting control;
• monitoring of controlling methods;
• global compliance;
• compliance with internal regulations by employees;
• assessment of the level of reliability of the provided information data;
• advising in accounting, tax, legal matters;
• participation in the direct automation of accounting, management and tax accounting;
• Checking the implementation of planned indicators.

Steps

Like any other economic or procedural procedure, the conduct of control measures provides for a phased sequence of performing specific tasks. Here are the main stages in the organization of the internal control system that this kind of procession is characterized by:

1. Initiating verification. Any control action is carried out either by order of the company's management, or as a planned event. The check is carried out on the basis of the order of the director or in the planned schedule of controlling procedures.
2. Planning control. Each inspection is preceded by the identification of some discrepancy in the functionality of the enterprise or the desire of managers to assess the state of affairs within the staff and the work they perform. Therefore, before direct control proceduresa planned survey of the area to be checked and the development of tactical directions in the reproduction of upcoming events are being carried out.
3. Direct verification. On a specific site for a specific period of time, certain documents are taken for examination and business operations are analyzed in their relationship with related processes of economic activity at the enterprise.
4. Preparing test results. Based on the results of all verification operations, the results of controlling are subject to mandatory documentation in order to provide final indicators to the company's management.
5. Carrying out relevant work after studying the results of the inspection. In the course of control operations, offenses committed by financially responsible persons are revealed, deviations from the norms are detected, cases of negligent attitude of some employees to work are observed, entailing, in a sense, damage to the economy of the enterprise as a whole. Therefore, such situational precedents give a reaction from the management apparatus in the form of a reprimand, deprivation of bonuses or dismissal of negligent subordinates. In addition, it is mandatory to analyze the data obtained and draw conclusions regarding the possible modernization of the labor process required at this stage in order to increase the efficiency of the company as a whole.

Analysis

Analysis of the internal control system in the organization is of no small importance in maintaining the quality and correctness of the internal audit onenterprise. Why is it so important in the modern business system? Because the analysis and evaluation of the internal control system of the organization is the impetus for the development of recommendations for its improvement and modernization of the business process as a whole. Not only is the verification of the procedural operations of the economic activities of an enterprise important in itself, but the level of effectiveness of its implementation can affect the prosperity and profitable functioning of the company as such.

Analysis of the internal financial control system of the organization is carried out by the relevant bodies of centralized subordination of the company in the following areas:

• analysis of controlling processes as an object of analytical research;
• survey of the qualification potential and professionalism of employees performing control activities;
• consideration of the quality of the organization of planned work carried out by the auditors in the form of preparation for the audit process itself;
• checking the outlined strategic action plan during the internal audit at the enterprise level;
• study of the availability of plans for inspections for the future, as well as an analysis of their relevance and the depth of the issues considered by the supervisory apparatus.

Rating

The concept of analysis is inextricably linked with the concept of evaluation. In a broad sense, this term involves the establishment of the absolute or relative value of the investigated object, subject, phenomenon. In terms of economicsubtext assessment of the internal control system of the organization implies a comparison with the norm carried out by the auditors during the audit of the actions, as well as consideration of the quality of the measures compiled by them, aimed at identifying inconsistencies, inaccuracies, errors in the course of business activities. Simply put, this is a test of the quality of the work of the inspectors themselves.

The combination of two related concepts - assessment and analysis - predetermines the need for additional activities after the audit. After all, based on the results of the analysis of the internal control system of accounting in the organization, the need to tighten, for example, labor regulations regarding the execution and storage of document flow, or decisions are made on more thorough and more frequent inventories of fixed assets of the enterprise, since in this part of accounting there are often inconsistencies with previous scores, and so on. And this applies not only specifically to the accounting department of the enterprise. That is, in other words, the assessment of the results obtained during the audit makes it possible to judge the need to improve the organization's internal control system or, conversely, draw conclusions about its quality functioning at this particular stage. By evaluating the final indicators acquired during the audit, one can also evaluate the work of the regulatory bodies themselves, based on the depth and content of their report at the end of the control activities.

Requirements

With all this, one should not forget that the internal control system used by the organizationmust comply with established standards and regulations. Moreover, this compliance should be carried out both at the enterprise level and in terms of compliance with current legislation. The Federal Tax Service provides that all existing organizations as business entities follow the order of June 16, 2017 "On approval of the requirements for the organization of an internal control system". Here's what these requirements are:

• Creation of such a controlling apparatus in the company, which will ensure the orderly and efficient conduct of business activities, the achievement of positive financial results, the safety of the assets and property of the enterprise.
• Formation of an environment adapted for high-quality controlling within the company.
• Developing a risk management system.
• The ability to check the existing facts of tax evasion, fees, insurance premiums.
• Disclosing the necessary information about possible risks and providing it to management in due form.
• Implementation of control procedures aimed at minimizing and reducing risks.

Based on the requirements for the organization of the internal control system, we can draw conclusions about a serious share of importance that is assigned specifically to risks - existing possible threats that are an integral element of potential fears of entrepreneurs.

Risks

The risk-based internal control model is a model that allows you to analyze threatsenterprises due to the need to acquire reliable information about the assets and liabilities of a given economic entity. Risk orientation in the organization of the internal control system implies the goal of the company's management to obtain a reasonable degree of confidence that the company will achieve its goals in the most effective way. And in this vein, the main purpose of control is to ensure timely identification and analysis of the risks of the reliability of financial statements, compliance of employees with the regulations and the norms for regulating the working labor process provided for by the accounting policy of the enterprise, as well as the implementation of financial and economic plans, the efficient use of resources, the truthfulness of financial and managerial information. Therefore, the main shield for a business entity in the fight against threats and risks that prevent it from functioning under normal conditions is a well-built and properly organized control.