What is Internal Control? The definition of internal control is a system and procedures of a company to protect assets within the company. It is also used to ensure compliance with applicable policies and regulations. What is meant by internal control is that all data from a section will be automatically checked by other sections in a company.
In accounting theory, internal control is a process influenced by human resources and information technology that is designed to help an organization or company achieve its respective goals. Internal control is a way to supervise, direct and measure human resources in an organization or company.
This internal control is quite important for the company because it concerns data within the company because every time data comes in it must be verified. Examples include job rotation, leave applications, official work reports, and so on.
This internal control system includes all methods and tools established to maintain the security of company property and data, check data accuracy, increase operational efficiency, and maintain previously established regulations. This activity in internal control is important to discuss because it is not much different from other activities such as business, production, and the legality of goods.
This book is aimed at officials who work in central government and regional government agencies related to accounting and reporting control systems, and State budget implementation control systems.
Understanding Internal Control According to Experts
Internal control has previously been discussed by experts. The following are several definitions of internal control.
1. Horngren (2009:390)
Internal controls are all plans and actions within an organization designed to safeguard assets, encourage employees to follow company policies, ensure proper accounting records, and improve operational efficiency.
2. Power (2016:159)
Internal control is a set of policies and procedures created to protect company assets or property from misuse, guarantee accurate accounting information, and ensure that all regulations and laws and management policies are complied with by all employees.
3. Dasaratha, V. Rama-Frederick, L. Jones (2008:132)
Internal control is a company policy process that is influenced by the entity’s board of directors, management, and other personnel. This was created to ensure certainty regarding several achievements including operational effectiveness and efficiency, accuracy of financial reports, and compliance with applicable regulations.
4. IAPI (2011:319.2) in Thorman Lumbanraja
Internal control is a process carried out by the board of commissioners, management and other personnel to ensure several achievements including the reliability of financial reports, operational effectiveness and efficiency, as well as compliance with applicable regulations.
5. Mulyadi (2013:163)
Internal control is an organizational structure , methods and measures that have been coordinated to safeguard the assets of a company whose duties include checking the accuracy of financial reports, encouraging operational efficiency and encouraging employees to comply with existing management policies.
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Types of Internal Control
Based on the objectives of internal control, this type of internal control is divided into two, namely, accounting internal control and administrative internal control.
1. Internal Accounting Control
What is controlled in internal accounting control includes data reliability, approval, separation of operational functions, recording, supervision and monitoring of company assets.
This book reviews modern ways of carrying out purchasing transactions and the needs of companies to carry out data and information processing activities effectively, efficiently , accurately and quickly for quality products/services and to be able to face current business competition.
2. Internal Administrative Control
In its control, internal administration takes care of several things including business efficiency, risk analysis, board of directors’ policies, resource management and quality control.
Based on their benefits, types of internal control are also divided into three groups, namely.
1. Preventive Control
This control is used to prevent errors from occurring. In this case, checks will automatically be carried out designed to prevent misuse.
2. Detective Control
This control is used to detect errors that occur in entering data.
3. Corrective Control
This control is used to provide information to management to correct errors that occur. These controls are designed to correct detected errors.
Based on its scope, types of internal control are also divided into two groups, namely.
1. General Control
This control is used to process all activities related to data on the computer. Things that are processed include, separation of responsibilities and data processing.
2. Application Control
This control is used to monitor the course of transactions and use of programs in computer applications. This control aims to ensure that every transaction is always recorded, authorized, processed and reported properly.
Internal Control Objectives
The following are some of the objectives of internal control in a company.
- To ensure company activities run according to applicable policies.
- To safeguard assets or finances in a company.
- To achieve the goals of the company that have previously been set.
- To produce accurate and precise financial reports.
- To prevent losses occurring to company resources.
- To ensure compliance with the policies set by company management.
- To encourage the effectiveness and efficiency of the company’s operational activities.
Internal Control Components
Internal control components are divided into five. The following are the components of internal control.
1. Control Procedures
In carrying out internal control, of course there are procedures that must be carried out first. This aims to ensure that internal control continues to run as planned. The existence of this procedure is also a precaution against fraud and errors in company activities.
Procedures in internal control include:
- Potential employees;
- Performance rotation and leave obligations;
- Performance reviews;
- Separation of functions and responsibilities;
- Protection of assets and accounting data.
2. Supervision
This supervision is also one of the important things in internal control. Supervision functions to ensure that all activities in internal control run according to applicable rules and guidelines. Apart from that, supervision also allows company management to identify things that can determine effective actions to achieve goals.
In this case, supervision can be carried out in two ways, such as special assessments or internal and financial audits, as well as direct identification of warning signals with the employees concerned and also the accounting system.
Examples of signals that are directly related to employees include changes in employee behavior and performance which gets worse every day, and employees often take leave for unclear reasons.
Then examples of accounting system warnings include unusual transactions carried out by the company to purchase company goods or differences in data between cash deposits and bank deposits.
3. Risk Assessment
Every activity carried out definitely has risks in it. This risk may be related to the business directly or indirectly. In this case the company assesses risks with company management which is carried out through analysis, action and evaluation.
Company management must take the necessary steps to overcome the risks that occur and to control them in order to achieve the company’s goals. By reducing risk, apart from achieving goals, companies can also get maximum profits and reduce losses.
Risks that occur in companies may include the risk of legal changes, internal fraud, competitor threats, political and economic situations, and market demand anomalies.
Another example is a warehouse manager analyzing the risk of employee back injuries. If the manager feels that the risk is significant then the company buys back the warehouse workers and asks to use the help.
4. Control Environment
The control environment is all aspects starting from behavior, structure and guidelines that exist in a company’s operations. With this control environment, a company can become more disciplined and structured.
There are several factors that influence the control environment, namely:
- Integrity and value of the company’s code of ethics;
- Management philosophy and operational style;
- Organizational structure;
- Administrative and personal practices;
- Operational policies;
- Commitment to competence.
This control environment becomes the foundation for the elements that form other internal controls. If an organization does not have a foundation, it will certainly collapse because there are no applicable rules and integrity that the organization has.
For example, human resource development policies. If this is not done based on good policies, the company will not be able to have human resources of good quality and in accordance with the company.
5. Information and Communication
Information and communication is also an important component of internal control. Without this information and communication, it will of course be difficult to carry out all internal controls such as policy formation, risk analysis and supervision that must be carried out.
This information and communication can be used as an assessment of an event or condition that can influence decision making and the company’s external relations.
For example, company management uses information from the Indonesian Accounting Standards Board to assess the impact of changes in the structure of financial statements in a company.
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Internal Control Concept
Below are several concepts in internal control. This concept is usually applied in several companies or organizations for their respective company goals.
- Internal control is the responsibility of company management. Even though it appears that the implementation of internal control involves all members, the management structure is still responsible.
- Provide reasonable and not absolute trust. This happens because there are many considerations regarding needs, costs and other goals.
- Internal controls have limitations. This implementation is not always effective, depending on the competence and reliability of the implementer.
- The data processing system in internal control is useful for developing information related to the company’s objectives.
- Internal controls have overlapping objectives in financial reporting, compliance, and operations.
- Internal control in auditing is a development process in accounting. This internal control is a comprehensive and integrated step and is not added to the company’s infrastructure.
Elements of Internal Control
To achieve the goals set by the company, it is necessary to have an internal control system. The company’s internal control system has the following elements.
1. Structure Separates Functional Responsibilities
The structure in the organization is a framework for the functional division of responsibilities in organizational units formed for the benefit of the company. The division of functional responsibilities in an organization is divided into the following two principles.
- Separated between operational functions and deviations from the accounting function. The operational function itself is the task of carrying out an activity, such as purchasing. Meanwhile, the storage function is the task of storing company assets.
- A function is limited, it may not carry out full responsibility for all stages of the transaction.
2. Authority and Procedures for Providing Protective Efforts
In an organization, every transaction can only occur because there is authority to approve the transaction. Therefore, in an organization there must be a system that regulates authority in every transaction to protect wealth, money, income and costs in the organization.
3. Healthy Practices in Organizational Tasks
The division of tasks and functions in the organization will not be carried out well if it is not done with healthy practices. The following are some healthy practices in carrying out authority and functions in the organization.
- Taking leave for eligible employees
- Use of forms with printed serial numbers whose use is accounted for by the authorized person.
- Transactions may not be carried out from start to finish by just one person or one organizational unit without the help of other people or organizational units.
- There are sudden inspections with irregular schedules.
- There is a rotation of positions to avoid collusion between officials.
- Matching of assets with records is carried out to safeguard the assets of an organization.
- Establish an organizational unit that has the task of checking the effectiveness of other internal control system elements.
4. Quality Employees
In the organizational structure, a recording system and various other methods should be created to encourage healthy practices in an organization with quality human resources as well. This is an important element in an organization is the presence of quality employees. The way for an organization to get employees who have potential and can be trusted is in the following way.
- Selection of prospective employees based on applicable criteria within an organization.
- Educational development for employees is carried out in accordance with job demands.
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Examples of Internal Control
After explaining from the definition to the elements of internal control, of course examples of internal control must be included. This example is taken from the case of a grocery store that is open 24 hours. An example of internal control is as follows.
- Installing surveillance cameras;
- Having a system for automatic cash recording to make work easier;
- Have two employees who work alternately and one person as a transaction recorder;
- Placing a cashier at the front entrance to make it easier for customers to make transactions;
- Make direct cash deposits to the bank before employee changes;
- Every employee change must be attended;
- Every incoming and outgoing item is recorded in a document or data system.
So that’s the explanation regarding internal control. It is clear that this is not what is meant by internal control. To have a good organization or company, of course you also have to create mature internal controls so that the assets within the organization or company are maintained safely.
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