Internal Controls: An Analysis of Importance in Organizations

This essay provides a comprehensive analysis of internal controls in organizations, emphasizing their critical role in business success. It begins by defining internal control and highlighting its importance in achieving organizational objectives, ensuring reliable financial reporting, and complying with regulations. The essay then delves into the five key components of an internal control system: control environment, risk assessment, control activities, communication and information, and monitoring. It explores the significance of each component in mitigating risks and promoting operational efficiency. The essay further examines the benefits of internal controls in business operations, including cost reduction, risk assessment, and policy implementation. It also highlights the importance of internal control in financial accounting, emphasizing asset protection, segregation of duties, and the prevention of errors and misstatements in financial statements. Finally, the essay underscores the need for documentation and continuous monitoring to ensure the effectiveness of internal control systems. The essay concludes by reinforcing the overall importance of internal controls for the holistic betterment of business organizations, both organizationally and financially.

Running head: INTERNAL CONTROLS IN ORGANIZATIONS
Internal Controls in Organizations
Name of the Student
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Author’s Note

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Introduction
In the era of 21st century, there are many factors contributing towards the success of the
business organization and Internal Control is considered as one of them. Internal control can be
described as a process that the board of directors, management and other employees design so
that reasonable assurance can be provided in some of the major areas such as effectiveness and
efficiency of business operations, reliability of financial reporting and compliance with the
required laws and regulations (Badara and Saidin 2013. Credulity is considered as a major
priority of the businesses and the presence of internal control makes the companies credible for
achieving their organizational objectives and goals. At the same time, it needs to be mentioned
that the effective implementation of internal control provides the organizations with the
necessary protection from financial, strategic and reputations risks (Aziz et al. 2015). In the
terms of auditing and accounting, internal control provides the assurance that the business basics
of the entities remain operationally efficient and effective. The main aim of this essay is to
analyze and evaluate the importance of internal control in the business organizations.
Components of Internal Control System
In order to discuss the importance of internal control, it is required to discuss about the
major components of an internal control system in the business organizations. It needs to be
mentioned that there are five interrelated components of internal control and they are discussed
below:
The first component is the Control Environment. Sometimes control environment is
regarded as ‘tone at the top’ and it is influenced by different internal factors of organizations like

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philosophy of the management, operating style, ethical values, integrity and commitment to
competence. The overall internal control of the companies will work effectively in case these
foundations are strong and the control environment is positive (Chen et al. 2014).
Risk Assessment is considered as the second component of internal control that refers to
the identification, analysis and management of the risks related to the achievement of
organizational goals and objectives. Different types of risks have adverse effects on the
operations of the organizations. After the identification of the risks, management is required to
take into consideration the impact of them and the likelihood to their occurrences (Fourie and
Ackermann 2013).
The next component is considered as Control Activities. Internal control activities are
referred to specific tools like techniques, policies, procedures and different mechanisms helping
the management in carrying out their directives. For this reason, control activities helps the
management of the companies in the identification, prevention and reduction of the business
risks that are considered as the major barriers in the achievement of the organizational
objectives. Some of the major examples of control activities are approvals, authorizations,
reconciliations, verification, documentation and others (Feng et al. 2014).
Communication and Information is the fourth component of internal control; and the
business organizations must have relevant, valid, reliable and timely communication in order to
control the business operations. For this reason, the organizational managers must obtain the
necessary information in order to make business decisions, risk determination and the
communication of policies and other required information within the organizations (Fourie and
Ackermann 2013).

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Monitoring is considered as the last and one of the major component of internal control
and the management is required to monitor the internal control system in order to ensure that the
internal controls are effectively operating. Ongoing monitoring occurs as the forms of different
managerial activities like supervision, comparison, checklist, reconciliation and others. All these
components play important part in the internal control of the companies (Chen et al. 2014).
Importance of Internal Control in the Organizations
The above discussion indicates towards the major components of internal control. Now, it
needs to be mentioned that internal control has some of the major benefits for the business
organizations and it can be divided into two segments; they are the importance of internal control
in the business operations and the importance of internal control in the financial accounting of
the business. The following discussion shows all these importance of internal control in the
business organizations:
Internal control has significant role to play in the promotion of the daily business
operations of the companies and helps the companies in the production of high-quality goods and
services at the lowest possible cost. In the presence of effective internal control, the management
of the organizations becomes able to limit the excessive inventory, high equipment costs and
excessive utilizes in order to ensure that the operation costs are maintained within the budget. In
addition, internal control assists the organizational managers to use their machines and
equipments effectively and optimally so that the malfunctions in them can be avoided. It implies
that the strategies of internal control help in the improvement of the operating environment of the
organizations.

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Risk assessment is regarded as another major contribution of an effective internal control.
It needs to be mentioned that there are certain risk components in every business decision and
strong internal control helps in the mitigation or avoidance of these risks (Lam 2014). In the
internal control, some of the major procedures for the ministration decision risks are to cap the
level of debt used for financing operations and acquisitions, to ensure the reinvestment of cash
into the business activities, to provide guidance in order to avoid investment in the risky
securities and others. Thus, it can be said that strong internal control has major importance in
preventing the management to make potentially hazardous business decisions that would have
long-term negative effects on the companies.
Different policies have major role to play for sustaining safe and profitable business
environment. These policies can be seen in different aspect of the business organizations like
human resources, awareness for the communities, establishment of business to business relations
and others and these policies are a major part of the internal control (D'Aquila 2013). The
managements of the business organizations inform their employees and organizational staffs
about this internal control in order to ensure that the reputation of the companies is not destroyed
in the presence of not so educated employee and staffs. It is one of the major requirement of the
public business corporations to have their internal control audited in order to find out any kind of
loopholes in the internal control system.
In most of the business organizations, the managements link the system of internal
control with the process of performance evaluation for the managers and other employees. In the
presence of this type of performance evaluation process, the managements of the companies get
the opportunity to make the employees aware of the organizational internal control by interacting
with them on a regular basis (Estampe et al. 2013). In this process, the employees learn to

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achieve the organizational goals and objectives by following the policies and procedures of the
companies. Most importantly, the importance of internal control cannot be ignored in the
effective separation and delegation of duties among all the employees and staffs of the
companies. For example, the presence of effective internal control makes the aspect sure that the
employees responsible for the management of accounts receivable of the company do not
involve in the management of accounts payable. It implies that it helps in the reduction of
internal fraud and theft of the companies (Estampe et al. 2013).
Apart from the above areas, strong internal control also ensures the smooth running of the
accounting and financial reporting of the organizations. In the organizations, the implementation
of internal control is done as per a risk-oriented approach in order to ensure that the
managements of the entities put focus on the high risk areas (Skaife, Veenman and Wangerin
2013). For example, in case a staff accuses that the petty cash is locked, the management may
immediately sense that there is a risk related to steal the cash. Thus, as a part of internal control it
is required to understand the risk as it will help in the determination of adequate internal control
for the mitigation of risks in the areas. For this reason, risk assessment is considered as the first
step for the establishment of strong internal control (Sharma and Panigrahi 2013).
One of the major purposes of the establishment of internal control is to provide protection
to the organizational assets and it leads to address the financial statement assertions of the
companies like existence, rights, accuracy and completeness (Feng et al. 2014). In this aspect,
performing the physical count of the inventory done in internally by the organization can be
presented as an example. Strong internal control helps in the correct counting of inventory and
track them in the organizational accounting system in order to ensure their existence. For the
verification of accuracy, cash receipts are counted in retail sales before recording them.

6INTERNAL CONTROLS IN ORGANIZATIONS
In the process of internal control system, segregation of duties is considered as one of the
major fundamental elements as the presence of proper segregation of duties assists in the
prevention of frauds. The presence of segregation of duties in the internal control is regarded as a
key process for making the aspect sure that no employee or staffs should perform two or three
business functions; they are custody, recording and authorization (Bentley, Omer and Sharp
2013). Organizational fraud can be effectively detected and prevented when there is effective
segregation of these three responsibilities. For example, in case an accountant both receives and
records cash, the accountant can easily commit fraud or manipulation. For this reason,
committing fraud or manipulation will not easy in case an accountant receives cash and another
accountant records them. Thus, companies are required to limit the access to only authorized
employees for preventing fraud (Abiola and Oyewole 2013).
Most importantly, the presence of string internal control helps in the prevention of errors
and material misstatements in the financial statements. For example, reconciliation is regarded as
a major part of internal control that critically ensures that there is not any difference or mismatch
in the accounts balances in the balance sheet and it leads to the prevention of material
misstatements in the financial statements. Apart from this, reconciliation assists the
organizational managers in the detection of errors in the financial statements (Hope, Thomas and
Vyas 2013).
Apart from this, implementation of strong internal control helps in the establishment of
company practices. In order to make the internal control existent, business organizations must
have documental evidence of internal control. Most of the business organizations have necessary
documentation of their internal control like flowchart and others as documentation is a critical
aspect to the organizations for the communication of internal control to the external auditors.

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Due to this, the auditors can get better understanding about the organizations (Pizzini, Lin and
Ziegenfuss 2014).
Conclusion
From the above discussion, it can be observed that internal control has some major roles
to play in the overall betterment of the business organizations. As per the above discussion, five
major components of internal control are control environment, risk assessment, control activities,
communication and information and monitoring. With the implementation of strong internal
control, companies can become beneficial from organizationally as well as financially. Strong
internal control helps the companies to promote their daily business activities with the help of
cost saving in production, delegation of authorities, implementation of required policies and
procedures and others. At the same time, business entities can assess business risk and their
impact on the business operations with the help of strong internal control. From the perspective
of financial operations, internal control helps in the identification and eradication of finance
decisions of the companies. The implementation of internal control prevents the accountants in
dealing with several financial activities that helps in the reduction of frauds and errors. At the
same time, strong internal control ensures the absence of material misstatements in the financial
statements. Thus, based on the above discussion, it can be concluded that internal control has
major impotence in the business organizations to increase the overall accuracy and efficiency of
financial as well as non-financial operations.

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