Internal control system is best regarded as the whole system of controls financial and otherwise made by the management in the conduct of a business entity which include internal check system, internal audit and other forms of controls.

Internal control systems play a critical role in the growth of a business in the following ways:

• Protecting Assets: Internal control systems help protect a business’s assets by ensuring that they are properly accounted for and safeguarded. This helps prevent losses due to theft, fraud, or errors.

• Compliance with Regulations: Internal control systems help ensure that a business is in compliance with relevant regulations and laws. This reduces the risk of fines, penalties, or legal action that could harm the business’s reputation and financial performance.

• Effective Decision Making: Internal control systems provide reliable and accurate information to support effective decision-making. This helps managers to make informed decisions and respond quickly to changing market conditions, improving the business’s performance and growth potential.

• Efficient Operations: Internal control systems help ensure that business operations are efficient and effective. This reduces waste and improves productivity, allowing the business to use its resources more effectively and grow more rapidly.

• Risk Management: Internal control systems help identify and manage risks, enabling the business to respond quickly to potential threats and take advantage of new opportunities. This reduces the risk of losses and increases the chances of success.

 

The most crucial components of an internal control system in a business entity are:

Control Environment: This component involves setting the tone for the entire organization, including establishing ethical values and behaviors, as well as a culture of accountability and responsibility. It includes the policies and procedures that are put in place to promote compliance with regulations and the prevention of fraud.

Risk Assessment: This component involves identifying and evaluating the risks that the organization faces. This includes assessing the likelihood and potential impact of risks and determining how to mitigate them.

Control Activities: This component includes the policies and procedures that are put in place to address identified risks. It includes activities such as authorization and approval processes, segregation of duties, and physical and logical access controls.

Information and Communication: This component involves ensuring that relevant information is communicated effectively throughout the organization. This includes providing clear guidance on policies and procedures, as well as ensuring that information is accurate and reliable.

Monitoring Activities: This component involves ongoing monitoring of the internal control system to ensure that it is functioning effectively. This includes regular reviews and evaluations, as well as audits and assessments by external parties.

The management lays down internal control system. This system contains plan methods and procedures of work done by various departments of an entity. It includes two basic parts:

• Financial Control System – This part of internal control system deals with aspects relating to the financial matters. The objectives of financial internal control system are to:
  • Ensure the accuracy and completeness of financial statements
  • Ensure compliance with relevant laws and regulations
  • Protect the organization’s assets including cash from theft, fraud, and misuse
  • Ensure the reliability of financial data used in decision-making
  • Ensure that financial transactions are recorded accurately and timely
  • Preventing debtors from becoming bad by establishing effective credit policy
  • Provide reasonable assurance that financial goals and objectives are met.

• Operational Control Systems – Operational Control Systems involve controls relating to the other activities of the organization. The operational internal control system is designed to ensure that operations are executed in compliance with policies, regulations, and laws, and that the assets of the organization are protected from misuse, damage, and loss. The objectives of operational internal control systems are to:
  • Ensure that operations are executed efficiently and effectively to meet business objectives.
  • Ensure compliance with relevant laws, regulations, and policies.
  • Prevent and detect errors, fraud, and irregularities that may occur in operations.
  • Promote the effective and efficient use of resources.
  • Provide reliable information for decision-making. For example, production, advertising, marketing, quality etc.