The owner of any economic object always cares about the quality of the organization of his economic activity. Any profitable enterprise carries potential profit for its owner. What kind of competent entrepreneur will not be interested in the functioning conditions of his own brainchild, which brings him such serious income? Probably, you need to be a fool to let things go by themselves and assume that it will always be that the work in the organization will proceed as systematically and will bring the same positive financial results forever, without delving into or interfering in the labor process of its subordinates. It is precisely because every businessman in his right mind and with an objective attitude to the management of his company is afraid of losing his profit and becoming bankrupt once, he introduced a system of internal control over the organization. What it is? What does this system give? How is it organized? And what are the goals? First things first.
What is an internal control system in an organization
An example of any indicative business entity is that enterprise which uninterruptedly carries out its economic activity and fulfills the main condition of its existence - it makes a profit by regularly increasing it. The owner of a company always directs all efforts and investments only to what makes his organization even stronger and more powerful, expanding the sources of return in the form of income. Of course, any owner wants his company to function smoothly. And he understands that for this it is necessary to take appropriate action. This is where the global need arises for organizing an organization’s internal control system. It clearly shows the need for the formation within the enterprise of such an apparatus for monitoring and identifying shortcomings in the business process, which will signal to the owner about any violations and inconsistencies. What should be a device of this kind?
The internal control system in the organization’s management is a set of methods for tracking, monitoring, checking, evaluating and analyzing all business processes and processes that take place at the enterprise, which are directly related to the results of the economic activity of the company as a whole. In other words, these are special employees, specific research methods, a list of analytical equipment and related technologies, which together give the very controlling effect that the business owner wants to be provided with. He needs such controlling in order to protect himself from dishonest subordinates or poor performance of their duties, which in the end can affect the financial result of the enterprise as a whole. But how is this process organized?
The organization of the internal control system in the company is the formation of such a favorable soil for the functioning of regulatory bodies in conjunction with their access to technical equipment and all the necessary information of the business entity, which can provide quality control in monitoring the work of workers and their immediate tasks in accordance with their job descriptions. Simply put, the creation of a controlling apparatus at an enterprise involves the performance by auditors of inspections at all functional areas of the company.
Goals
A competent businessman never does anything aimlessly, therefore, he thinks out every action, innovation, order or order given through the director to the smallest detail and implements his enterprise in the economic activity to achieve a specific result. Accordingly, the same is with the controlling apparatus. There are four main goals of an internal control system in an organization that guide any owner to avoid problems:
- Checking the effectiveness of economic activity. It implies the need to monitor and track the economic operations carried out at the enterprise in order to identify possible deviations and suppress them.
- Information Security. It involves the organization of the transparent functioning of the accounting department in providing reliable, objective, complete and timely reporting to management and higher authorities.
- Suppression of theft and unlawful actions of employees. This refers to tightened control over possible incidents of money laundering and fraud by employees within the enterprise.
- Compliance with regulations. Each unit of staff in the personnel apparatus must strictly follow the internal regulatory schedule of work.
Trying to protect himself and the fruits of the functioning of his company in the form of revenue, its owner sets specific goals. These goals are successfully realized thanks to the effective organization of the internal control system in the organization.
Structure
The controlling mechanism in any enterprise is carried out through the hierarchical subordination of regulatory bodies. At each site there are bodies responsible for conducting observational and verification activities. What does the example of the internal control system in the organization look like from the point of view of structural hierarchical subordination?
Of course, much depends on the form of government in the enterprise. With a small company and a staff of three or four people, everything is clear, there’s nothing to control there, the immediate supervisor does this. But in large enterprises everything is different: the larger the company, the more relevant internal control measures should be distributed across its structural departments. For example, the organization of internal control in corporate systems is carried out in the context of several structural blocks:
- The first block is the board of directors, the main and unshakable management apparatus, which centrally manages and controls.
- The second block - involves the branching of control from the board of directors into two main bodies in the form of the apparatus of the board and the audit committee.
- The third block - provides for the separation of control from the board of directors into heads of all departments existing in the company, which, in turn, control the direct activities of their subordinates in each department.
- The fourth block - involves the dispersal of the controlling responsibilities of the audit committee into the risk management unit and the internal control unit.
Based on the block structure of control bodies in the company, it can be concluded that the corporate forms of government have two directions: these are separate structural bodies within the enterprise and the heads of departments that monitor their subordinates. Often, this is exactly what the organization of the internal control system of the enterprise is doing.
The structure of supervision of financial institutions looks a little different. The credit institution’s internal control system provides for six main sources of distribution of relevant measures at certain levels of the hierarchy:
- credit institution management bodies;
- the head and his deputies;
- chief accountant and his deputy;
- audit commission or auditor in one person;
- special control units;
- other structural units of the credit institution control bodies.
Kinds
The classification of varieties of internal supervision is quite multifaceted due to the large number of features of the unit. Thus, the creation of an organization’s internal control system provides for several branches in the main areas.
In order of implementation:
- administrative;
- managerial;
- financial;
- technological;
- legal;
- accounting.
According to the form of provision:
- actual;
- computer;
- documentary.
On a temporary basis:
- preliminary;
- current;
- subsequent.
By completeness of coverage:
- full and partial;
- solid or selective;
- complex or thematic.
Methods
In addition to the listed types of supervision, audit procedures carried out at the enterprise can be manifested in the implementation of various methodological approaches to verification. Therefore, the organization of the internal control system at the enterprise involves the use of a set of three main methodological areas.
General methods:
- Audit - involves the control of accounting and financial reporting.
- Monitoring - involves studying the correctness of the procedures performed in specific areas in specific departments of the enterprise.
- Revision - carried out by means of verification manipulations with the documentation.
- Analysis - calculates specific economic indicators and compares them with the values of the norm.
- Thematic check - it is carried out for something specific, for example, checking the cash desk and cash.
- Internal investigation - arises in the event that any non-compliance with the regulations or an offense of a materially responsible person is revealed.
Methods of documentary control:
- Legal assessment - refers directly to the authority of the legal department at the enterprise with verification measures regarding contracts and other documentation.
- Logical control - is carried out in order to verify the profitability of ongoing business operations reflected in the relevant documents.
- Arithmetic verification - manifests itself in a concrete miscalculation and comparison of indicators in documents with real data.
- Counter check - involves raising the primary for a specific period and its analysis: this includes freight bills, tax bills, adjustments to tax bills and more.
- Formal check - provides for the monitoring of the presence of mandatory documents on the basis of which certain operations were carried out.
- Comparative check - reveals inaccuracies and inconsistencies in digital, total, equivalent data.
Receptions of actual control:
- Inventory - involves checking the system of internal control of accounting in the organization of the availability and recalculation of such property as fixed assets, tangible and intangible assets, cash on hand, cashless finances in bank accounts and so on.
- Expertise - conducted by attracting an expert or a staffed specialist in a specific issue of a certain direction.
- Visual observation - involves monitoring the employee and his work from the outside. For example, this is how a senior accountant can observe the performance of his duties as an ordinary accountant.
- Control metering - it is distinguished by a sudden decision to check for quantitative or qualitative reproduction of a particular operation at the enterprise with a view to comparing it with the norm.
- Analysis of management information - determines the study of orders, orders, decrees of an internal nature and verification of the results of their implementation.
Functions
The organization of an internal oversight system in the organization of any form of ownership provides for the performance of specific functions by the relevant authorities. Indeed, each controlling operation involves the achievement of a certain result. The global result should be the smooth operation of the enterprise with a regular and stable amount of income. And to achieve it seems possible only when performing a set of strategic functions. Here are some of them:
- Monitoring the economic activity of the company and its external environment - includes tracking market trends, changes in demand needs, as well as competitive facilities and their policies.
- The development of strategic directions of the company’s activities - provides for the achievement of the main goal of the company through tactical steps in operational and economic activities.
- Creation of a risk assessment and management system - the controlling bodies of any enterprise should have an idea of the adverse factors that threaten it within its activities.
- Evaluation of investment and investment projects - internal control should be carried out to assess the productivity, rationality and profitability of the projects invested by him.
Moving from general to particular, we can distinguish the current functions of the organization’s internal control accounting system as fundamental information data for conducting high-quality internal inspection at the enterprise:
- the study of existing accounting systems;
- assessment of the productivity and profitability of these systems;
- financial analysis and accounting control;
- monitoring of controlling methods;
- global compliance with legislation;
- compliance with internal regulations by employees;
- assessment of the reliability level of the provided information data;
- consulting in accounting, tax, legal matters;
- participation in the direct automation of accounting, management and tax accounting;
- verification of the implementation of targets.
Stages
Like any other business or procedural procedure, the implementation of control measures involves a phased sequence of specific tasks. Here are the main stages of the organization of the internal control system that characterize this kind of procession:
- Initiation of verification. Any control action is carried out either by order of the company management, or as planned activities. Inspection is carried out on the basis of the order of the director or in the planned schedule of controlling procedures.
- Control planning. Each check is preceded by the identification of any inconsistencies in the functionality of the enterprise or the desire of executives to assess the state of affairs within the staff and the work performed by it. Therefore, before the direct control procedures, a planned examination of the site to be checked is carried out and tactical directions are developed in the reproduction of upcoming events.
- Direct verification. At a specific site for a specific period of time, certain documents are taken for examination and business transactions are analyzed in their relationship with related processes of economic activity at the enterprise.
- Preparation of verification results. Based on the results of all verification operations, the results of controlling are subject to mandatory documentation to provide final indicators to the management of the company.
- Conducting appropriate work after studying the results of the audit. In the course of conducting control operations, offenses committed by materially responsible persons are revealed, deviations from the norms are detected, cases of negligent attitude of some employees to work are detected, entailing, in a sense, damage to the economy of the enterprise as a whole. Therefore, such situational precedents give a reaction on the part of the governing apparatus in the form of a reprimand, deprivation or dismissal of negligent subordinates. In addition, the analysis of the data obtained is mandatory and conclusions are drawn regarding the possible modernization of the labor process required at this stage in order to increase the efficiency of the company as a whole.
Analysis
The analysis of the internal control system in the organization is of no small importance in maintaining the quality and correctness of the internal audit at the enterprise. Why is it so important in the system of modern entrepreneurship? . , .
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Requirements
For all this, do not forget that the organization’s internal control system must comply with established standards and regulations. Moreover, this compliance should be implemented both at the enterprise level, and in terms of compliance with applicable law. The Federal Tax Service provides for the follow-up of all existing organizations as business entities to the order of June 16, 2017 “On the Approval of Requirements for the Organization of an Internal Control System”. Here is what these requirements are:
- The creation of such a controlling apparatus in the company, which will ensure the orderly and efficient conduct of business, the achievement of positive financial results, the safety of assets and property of the enterprise.
- Formation of an environment adapted for conducting quality controlling within the company.
- Development of a risk management system.
- The ability to verify existing facts of tax evasion, fees, insurance contributions.
- Disclosure of necessary information about possible risks and providing it to management in due form.
- Implementation of control procedures aimed at minimizing and reducing the level of risk.
Based on the requirements for the organization of the internal control system, we can draw conclusions about the serious share of importance that is assigned specifically to risks - existing potential threats that are an integral part of potential fears of entrepreneurs.
The risks
The risk-based model of internal control is a model that allows you to analyze the threats of an enterprise due to the need to acquire reliable information about the assets and liabilities of a given economic entity. Risk orientation in the organization of the internal control system implies the goal of company management to obtain a reasonable degree of confidence that the company will achieve its goals in the most effective way. And in this vein, the main purpose of control is to ensure the timely identification and analysis of risks of reliability of financial statements, the compliance of employees with the regulations and the rules of the work process stipulated by the accounting policy of the enterprise, as well as the implementation of financial and economic plans, efficient use of resources, the veracity of financial and managerial information. Therefore, the main shield for a business entity carrying out economic activities in the fight against threats and risks that prevent it from functioning in normal conditions is a quality-built and properly organized control.