Internal Control: Importance, Strengths, And Weaknesses

Disucss about the sources of weaknesses and strengths.

Background of Internal Control

Internal Control is defined as it is the process of preventing frauds, inefficiency, inadequacy and the errors by the reliable, authentic, and compliances with laws and specific regulation and policies. As per the view of Louwers, Ramsay, Sinason, Strawser &Thibodeau (2015), Internal Control is one of the most important processes that is must need to be adopted by each and every organisation. Internal Control helps to fix the errors of the internal process of functions or operation. On the other hand, it also helps to achieve the objectives of the company. It assists the personnel by doing the operation effectively and efficiently. In this assignment, the learners have focused on the Internal Control and its strengths and weakness. The clear and transparent policies should be taken so that it can maintain the appropriate application of the internal control system policies. There are some advantages and also have some disadvantages of Internal Control which need to be elaborated to get the knowledge of the Internal Control. Therefore, in this chapter, various points are discussed for the further research in the future.

In this recent era, Internal Control is well known by every senior manager in every organisation and the term is understood by all of the employees working for the company. But, the term is first introduced by the American Institute of Certified Public Accounts (AICPA). The Securities and Exchange Commission (SEC) of United States used the accounting and controls for the Security Exchange Act 1934. And this was further followed in 1958 and 1972. As per the view of Feng, Li, McVay & Skaife (2014), the public organisationcomes under the Act and it is said that it needs to implement adequately to control and protect the financial documents and information. After this, every organisation had adopted the strategy of the Internal Control and so that it has given many facilities to the company as well as the employees also.  Due to its uncountable features and advantages, the senior managers of the institution has taken the rules and legislation of Internal Control (IC) and therefore, the managers were able to reach the goal of the company. IC assists the enterprise by providing the authentic and transparent financial report to the shareholders and stakeholders also. As because of this, the employers and employees are also able to fulfill the objectives and due to the benefit of IC, it helps the operation process to do effectively and efficiently.

Importance of Internal Control

The learners have discussed on what the Internal Control is and what the strengths and weakness are. The many types of research have been done by the researchers and took the final report after analysing the information and data from various sources.  IC has much strength, and therefore each and every organisation like small and big enterprises have taken the Internal Control that is auditing and accounting. In this regard, Balsam, Jiang & Lu, (2014) have depicted that as IC plays the vital role for the development and improvement of the company so that there must be responsible and experienced Auditor who can control and protect the internal process of the operation and functions. On the other hand, De Simone, Ege (2014) argued that this cannot be done by the internal auditors but it could be done by the external auditors so that the process could be done accurately and neutrally. Thereat, the strengths and weakness of the Internal Control have discussed below:

There are so many strengths of Internal Controls. Therefore the organisation has decided to take this laws and legislation for improving the overall process of the operation. The researchers have elaborated the advantages, these are:

This is the first and most important requirement that is provided by the Internal Control. It has been seen from the various researches that the cost is one of the major valuable things. Thus every organisation has its operation and function costs. Therefore, to manage the cost effectively, IC is needed. IC helps to manage the effectiveness of the cost. It helps by evaluating the various process and methods. If the size of the team is big, then Internal Control assists by reducing the cost. As per the view of Brown, Pott &Wömpener (2014), the internal auditor team need to be hired from the other offices for inspecting the overall operation and so that the performance could be developed through counselling and coaching.

The audit and accounting is the important requirement for the company to fulfill the objectives of the company. Superior audits and studiesare necessary for the entire department for performing the roles and responsibilities effectively and efficiently. As mentioned by Lin, Wang, Chiou & Huang. (2014), that the studies help the employees to do better performance and therefore, they could be able to give the best effort to their own work. Sometimes, the special training and coaching are given to the subordinates who are weak to do his job decided by the managers.

Strengths of Internal Control

The authorisation is one of the biggest requirements for the organisation which helps to control the consistent structure. It has been seen after various analyses that when any employee is signing off at any stage of the procedure, then the auditor could be able to track the problems or the difficulties from where the problem is originated. The situation can be elaborated by the example that is if a new product is manufactured, then the authorisation is necessary for the process with the specific design. Moreover, the authorisation is also needed for designing the process. Therefore, it could be said that approval is the most important thing to manufacture the products and also to transfer it. In this regard, if the process is a failureto produce the product then the responsibility can be traced back through the approval and can be able to fix the problem.

This is one of the strengths of the Internal Control. The organisation has the Internal Audit department who updates the information and knowledge of the new process have been launched in the market. In this competitive world, many companies are adopting the new and creative information system so that the process could be done easily within a short time of period with accurately and effectively. Therefore, the Internal Control is necessary for providing the training and developing the auditors as per the information and knowledge. Training helps the auditors to do better performance and therefore, they could be able to give the best effort to their own work. Sometimes, the special training and coaching are given to the subordinates who are weak to do his job decided by the senior managers. In this regard, Chang, Yen, Chang & Jan (2014) have depicted that training and developing to the auditors are the most important advantages as these persons will look after the entire process of the company.

Internal Control is as important as other responsibilities. IC helps to strengthen the internal operation. It could be said after measuring the various researches that the internal operation could be done in a better way if the audit report would be reported after each and every process. As per the view of  Vovchenko, Holina, Orobinskiy & Sichev (2017), if any employee ignores to do the job and as because of this the production team is failing to produce the products then the internal audit team can send the appraisal to the Senior Manager or Director whether the chief manager can take the necessary action for the employees by asking him what is the reason for such critical irregularities. Therefore, it could be said that Internal Audit Team takes a vital role in strengthening the Internal Controls as they are playing an important character in the organisation.

Weaknesses of Internal Control

Internal Audit Team is the mostimportant department for each and every company as the business is dealt with huge money. In this digital world, lots of systems are introduced and the companies are taking these systems to reduce the production time and labour cost. But it has also been seen from the report that there are also the frauds available thatlook for any chances to steal the money or the confidential information. In such cases, the Internal Control takes a significant role to prevent this fraudulence.  As per the view of Newton, Persellin, Wang & Wilkins (2015), the organisation must need to sign the check to do the business. On the other hand, Khlif & Samaha (2014) has depicted that the bank says to submit the signatures of the people who are authorised persons and are doing the business so that the bank could be able to verify the checks before issuing the money to someone.

Internal Control also helps in preventing the error of any kind of process or documents. The internal audit team of the enterprise inspects every procedures and method and even the documents that are availed by the specific employees from the different departments in the company. In this regard, Pizzini, Lin & Ziegenfuss (2014) depicted that due to the multiple of the works, the employee can make mistakes. But there is the Internal Audit Team who can prevent the error of the work by inspecting and observing such documents. The auditor helps to prohibit the mistakes what the employee has done. Therefore, it could be said that the Inter Control or Audit is the most significant requirement that the company must have. IC helps to the employees by interpreting what they could or could not do when executing their duties that will assist to protect the company.

The researchers have mentioned the above-mentionedstrengths of the Internal Control. Similarly, the IC has also some weakness, and due to this, the business owner must address these. Inter Control helps by providing the specific policies to the business owners whereas the internal audit helps by reviewing the internal operation and employee performance. The weakness of the Internal Control is described as follows:

It has been seen from the mentioned advantages of IC that the application of the Internal Control System is broad. As because of this, it could create the poor internal control system. In this regard, Lenz & Hahn (2015) said that the business owners need to endeavour to improve the system that will focus on the specific business issues. On the other hand, Alzeban & Gwilliam (2014) argued that the company must need to adopt the Internal Control System but, a few clear and transparent policies should be taken so that it can maintain the appropriate application of the internal control system policies.

It has been seen that many businesses continues during the lean resources and short time is frequently expended for implementing the information system. To invest the time in such a situation can enhance much efficiency in the long run. It is necessary to perform the job systematically. Therefore, this would help the operation to keep the business competitive and effective. There are lots of software systems available in the market which is also user-friendly and could be able to reduce the processing time and these are not at all expensive. As stated by Ege (2014), that due to the broad application system, the information system could be ineffective but the internal control should observe for improving such systems.

As per the view of Abbott, Daugherty, Parker & Peter, (2016), the other weakness of the Internal Control is that it is time-consuming as it has the broad application. To protect the internal process, the time is required but one business owner has to face many challenges in running the business. To control and protect the internal process, he needs to get around the control system every time which is very time-consuming. So, it is one of the weaknesses of it that creates the difficult management conditions for the entrepreneurs endeavouring to manage the appropriate business practices. Thereat, the entrepreneur or the businessman might also unable to give the time for reviewing Internal Control System.

Internal Control is one of the most important process that is must need to be adopted by each and every organisation. Internal Control helps to fix the errors of the internal process of functions or operation. The business proprietor might unconscious on the best system which is necessary to implement the process in the organisation. Therefore, this would create a lack of knowledge on the system and henceforth difficulties could be aroused in protecting the business as well as the information of the finance. In this regard, Chang et al. (2014) have said that the business owners have to avoid the weakness and so that they should consult with the reputed accounting or audit firm.

Conclusion:

It could be said after measuring Internal Control is well known by every senior manager in every organisation and the term is understood by all of the employees working for the company. The strength and weakness of the Internal Control that the business owners need to avoid the weakness so that they could be able to reach the goal of the organisation. IC plays the vital role in the development and improvement of the company so that there must be responsible and experienced Auditor who can control and protect the internal process of the operation and functions.

References:

Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40.

Alzeban, A., &Gwilliam, D. (2014). Factors affecting the internal audit effectiveness: A survey of the Saudi public sector. Journal of International Accounting, Auditing and Taxation, 23(2), 74-86.

Balsam, S., Jiang, W., & Lu, B. (2014).Equity incentives and internal control weaknesses. Contemporary Accounting Research, 31(1), 178-201.

Brown, N. C., Pott, C., &Wömpener, A. (2014). The effect of internal control and risk management regulation on earnings quality: Evidence from Germany. Journal of Accounting and Public Policy, 33(1), 1-31.

Chang, S. I., Yen, D. C., Chang, I. C., & Jan, D. (2014). Internal control framework for a compliant ERP system. Information & Management, 51(2), 187-205.

De Simone, L., Ege, M. S., &Stomberg, B. (2014). Internal control quality: The role of auditor-provided tax services. The Accounting Review, 90(4), 1469-1496.

Ege, M. S. (2014). Does internal audit function quality deter management misconduct?. The Accounting Review, 90(2), 495-527.

Feng, M., Li, C., McVay, S. E., &Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, 90(2), 529-557.

Khlif, H., &Samaha, K. (2014). Internal Control Quality, E gyptian Standards on Auditing and External Audit Delays: Evidence from the E gyptian Stock Exchange. International Journal of Auditing, 18(2), 139-154.

Lenz, R., & Hahn, U. (2015).A synthesis of empirical internal audit effectiveness literature pointing to new research opportunities. Managerial Auditing Journal, 30(1), 5-33.

Lin, Y. C., Wang, Y. C., Chiou, J. R., & Huang, H. W. (2014). CEO characteristics and internal control quality. Corporate Governance: An International Review, 22(1), 24-42.

Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., &Thibodeau, J. C. (2015). Auditing & assurance services.McGraw-Hill Education.

Newton, N. J., Persellin, J. S., Wang, D., & Wilkins, M. S. (2015). Internal control opinion shopping and audit market competition. The Accounting Review, 91(2), 603-623.

Pizzini, M., Lin, S., &Ziegenfuss, D. E. (2014). The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.

Vovchenko, G. N., Holina, G. M., Orobinskiy, S. A., &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), 350-368.