Internal Control: A Critical Review of Literature and Frameworks

This report provides a critical review of internal control systems within organizations, examining their objectives and importance in promoting efficiency and reliability in financial reporting. It delves into the COSO framework and ISA 315, exploring how internal controls, including integrity in management, division of duties, and competent personnel, are implemented. The report critically evaluates the limitations of internal control, such as potential ethical dilemmas, the impact on employee morale and decision-making, and the associated costs. It references various studies and frameworks to analyze the effectiveness of internal controls in mitigating risks, managing employee performance, and ensuring compliance with regulations, ultimately providing insights into the complexities and challenges of establishing and maintaining robust internal control systems. The report emphasizes the need for a balanced approach that considers both the benefits and drawbacks of internal controls in order to optimize organizational performance.

CRITICAL REVIEW

Table of Contents
INTRODUCTION...........................................................................................................................1
Literature Review on Internal Control .......................................................................................1
COSO framework and ISA 315..................................................................................................2
Limitations of Internal control ...................................................................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Internal control in organisations comprise accounting and auditing which assist the
individual organisational growth in order to attain goals and objectives. Internal control is
strictly monitored by the management in improve the efficiency and reliability of financial
reporting, policies and regulations. The report will critically evaluate ideas and information
about the objectives and importance of internal control in company. Thus, the report will
analyse the idea over integrity in management, division of duties, maintenance of record,
competent personnel and many more factors which are concerned with the internal monitoring
and control.
Literature Review on Internal Control
Internal control in organisation plays vital role in establishing effectiveness and
efficiency in micro business operations. According to Chen, Chan and Zhang, 2017, is the
strategy which assist the firm in evaluating the need of changes which can be related to
employees, manage functions, departmental operations, or finance reporting. It is the best
technique which reduce the chance of uncertainty in entity. However, in contrary the control on
micro factors sometimes leads to wrong evaluation of situation. In contrast, as per the views of
(Vovchenko, Holina and Sichev, 2017), the ultimate objective to establishing internal control in
organisation is to manage risk and treats which can hinder the business performance. Further, it
is the best way of improving working efficiency and effectiveness of organisational functions.
Apparently, the best method used by the firm to monitor and control internal functioning is
SWOT analysis which assist the management in determining internal strengths and weakness
which can resists the market changes. It is evaluated by the enterprise to determine individual
efforts in organisational functioning. Therefore, it has been evaluated that the internal
functioning is interrelated to management structure which assist the directors in overseeing the
view which demonstrate a critical view of employee interpreting, financial reporting, division of
duties etc. In addition to this, Katmon and Al Farooque, 2017 has stated that internal auditing is
the method used by business to control functions, evaluate employee performance make effective
decisions and calculate the risk involved in process. Apart from this, the internal control is the
best way which assist the enterprise in establishing strict control over the functions and
employees activities. Further, according to Yee, Sujan and Leung, 2017, there are various
situation which the actual profits and loss are hidden from the management but the strict control
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process is helps the firm in establishing control over all the unethical practices which can lead to
cheating. In addition to internal control it assists the organisation in measuring employees
performance on regular basis which assist in determining employees skills and capabilities
individually. Moreover, it assists the management in evaluating the participation of workers in
business operations. Internal monitoring and controlling is the best practices as it helps the
management in preventing disastrous activities in the enterprise such as, harassment,
discrimination, favoritism etc. Therefore, it is the kind of security which has been provided by
management to employees whereas according to few staff members it is spying over workers due
to which the workforce loses their efficiency of working. According to Dana and et.al., 2012, it
is conducted by the firm to establish strict control over the business operation and employees
activities in prevent the risk of uncertainties. In accordance Skaife, Veenman and Wangerin,
2013, has stated that internal control is the process and plan of enterprise to coordinated methods
and procedures to maintain the accuracy and reliability of data, operations and managerial
policies. It plays a important role in establishing stability in all the organisation and management
functions. The process assists the management in establishing communication with employees
which is the best of analyzing internal problems and issue which can create problems.
COSO framework and ISA 315
It has the objective of auditing in which auditor is liable analyse the risk involved in internal
business operations which can arise due to misstatement, fraud or minor error in financial
statement. It aims ta providing internal control designing for controlling risk and uncertainties
which can arise due to fraud and misstatement errors in financial reporting. The standards are
focused on Management and its governance which is enhanced to maintain a culture of Ethical
behaviour, trust and honesty in an organisation.
Limitations of Internal control
Apparently, it has been critically evaluated that the internal control process is the slow
decision making process and moreover it isolates employees from top level management due to
which the director only take decisions ion the behalf of conveyed information. Controlling the
organisational functions sometimes leads to spying employees which is not ethical. This is the
ethical dilemma face by the management in which the enterprise is not able to determine the
right and wrong of the situation (UNDERSTANDING INTERNAL CONTROLS, 2017). For
instance, if the management has established the strict monitoring over employees to control the
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unethical activities of employees such as, harassment, cheating, theft etc. than sometimes it turns
into spying when the management fu starts accessing emails of employees and monitoring their
actions through CCTV. Further, the situation has it owns right and wrong due to which the
internal control by organisation turns arguable. Moreover, the system damage employees morale
who are working with organisation from long period. Hence, it is the another ethical dilemma of
the business in which the right and wrong of control can not be determined. Further, it is
important for the organisation to establish control on the functions in order to improve efficiency
and effectiveness. However, the process is cost and sometimes not in favour of employees
which degrades their morale (Carolyn and Paolo, 2014). On the other hand, Measuring
employees performance degraded their performance and morale because according to staff
members the enterprise is keeping an eye of their every them due to which the individual loses
the ability to work effectively and efficiently(Cheng, Dhaliwal and Zhang, 2013). In addition to
this, the internal control and monitoring impacts the decision making skills of workers as the
staff becomes dependent on management decisions (UNDERSTANDING INTERNAL
CONTROLS, 2017). However, the internal control process of firm is very expensive and time
consuming.
Furthermore, there are various polices and procedures which are used by the top
management to make effective control over all the activities and according to various
organisation like, Tesco, Sainsbury, Aldi establishing appropriate policies and procedure is the
best methods to control and monitor performance (Feng, Li and McVay 2017). Whereas on the
other hand according to managers and employees functioning according to plan and policies
limits the employee's performance due to which the workers can not work beyond the boundaries
set by management. Control is not set by the organisation to mitigate risk instead it is established
to eliminate risk and uncertainties. The system leads to various problems between employees
which leads to conflicts and disputes (Doyle, Ge and McVay, 2017.). For instance, if the
management has strict control over employee's performance than it is possible that some workers
will get promoted, demoted and retrenched due to which the morale and performance of
employees gets affected, The demoted employee will not perform effectively as the appraisal
method has degraded their positioning. This measurement degrades employees morale of
working efficiently and effectively. For instance, there are many situations in organisation in
which the employees do not like management to interfere but due to strict internal control the
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management has to interrupt in employees functioning which turns into strict monitoring and this
interrupts the entire business process.
In contrary, the division of workers according to plan of management and not according
to skills and capabilities of employees decrease the working efficiency of employees with
enterprise. For instance, if there is one team working effectively but according to manager the
individuals are getting friendly with each other, than if management shuffles the team not
keeping in mind their working abilities when together than it completely degrades the working
efficiency of employees. In contrast, excessive control in company leads to increased
bureaucracy and reduced productivity. For instance, if the management while establish strict
control than the employees will find many other effective technique to cheat the control system
which due to which the productivity of functions will decrease (UNDERSTANDING
INTERNAL CONTROLS, 2017).
Henceforth, it has been analyzed that internal control system in organisation increases the
complexity of business operations and reduce the ability of time management however, it has
been established to improve the efficiency and effectiveness of business operations, improve the
reliability of financial reporting and assist the firm in determining the compliance with laws and
regulation to make smooth functioning.
CONCLUSION
The report summarized the role of internal control system in an organisation. Further,
with the critical review it evaluated various techniques used by the enterprise to control the
internal function of managers and employees. It outlined the dilemma which arise in from of
organisation when establishing internal control in company. Internal monitoring and controlling
is the best practices as it helps the management in preventing disastrous activities in the
enterprise such as, harassment, discrimination, favoritism etc. Moreover, the process assists the
management in establishing communication with employees which is the best of analyzing
internal problems and issue which can create problems. Thus, it analyzed that the division of
workers according to plan of management and not according to skills and capabilities of
employees decrease the working efficiency of employees with enterprise.
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REFERENCES
Books and journals
Chen, J., Chan, K.C., Dong, W. & Zhang, F., (2017). Internal control and stock price crash risk:
evidence from China. European Accounting Review. 26(1). pp.125-152.
Cheng, M., Dhaliwal, D. & Zhang, Y., (2013). Does investment efficiency improve after the
disclosure of material weaknesses in internal control over financial reporting?. Journal
of Accounting and Economics. 56(1). pp.1-18.
Doyle, J., Ge, W. & McVay, S., (2017). Determinants of weaknesses in internal control over
financial reporting. Journal of accounting and Economics. 44(1). pp.193-223.
Feng, M., Li, C. & McVay, S., (2017). Internal control and management guidance. Journal of
Accounting and Economics. 48(2). pp.190-209.
Katmon, N. & Al Farooque, O., (2017). Exploring the Impact of Internal Corporate Governance
on the Relation Between Disclosure Quality and Earnings Management in the UK
Listed Companies. Journal of Business Ethics. 142(2). pp.345-367.
Skaife, H.A., Veenman, D. & Wangerin, D., (2013). Internal control over financial reporting
and managerial rent extraction: Evidence from the profitability of insider trading.
Journal of Accounting and Economics. 55(1). pp.91-110.
Vovchenko, G.N., Holina, G.M., & Sichev, A.R., (2017). Ensuring Financial Stability of
Companies on the Basis of International Experience in Construction of Risks Maps,
Internal Control and Audit. European Research Studies Journal. 20(1). pp.350-368.
Yee, C.S., Sujan, A., James, K. & Leung, J.K., (2017). Perceptions of Singaporean internal audit
customers regarding the role and effectiveness of internal audit. Asian Journal of
Business and Accounting. 1(2). pp.147-174.
Online
UNDERSTANDING INTERNAL CONTROLS. 2017. [Online]. Available through:
<http://www-bfs.ucsd.edu/blink/ocbfs/acc/UnderstandIC.pdf>.
Carolyn D. and Paolo C. 2014. Evaluating Internal Control Systems. [Online]. Available
through: <http://www.interniaudit.cz/download/IIA/Evaluating-Internal-Control-
Systems.pdf>.
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Dana R. and et.al., 2012. How Effective are Organizations’ Internal Controls? Insights into
Specific Internal Control Elements. [Online]. Available through:
<http://aaapubs.org/doi/pdf/10.2308/ciia-50146?code=aaan-site>.
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