Internal Control Systems: A Significant Part of Business and Technology-F1
Business and technology studies are no longer just an extensive option but a necessity for businesses to thrive in the modern business world. Business and technology – ACCA exam in FIA , studies will take you on a path where you will gain knowledge on how to run a business legally, ethically, efficiently, and economically. Business and technology play vital roles for multinational companies, entrepreneurs, and sole traders. The business and technology studies consist of an extensive collection of 19 chapters. Each chapter holds its own importance in constructing an individual to be sustainable in the business world. Learn more about FBT course outline on ACCA Global. But today’s subject matter is the internal control system. Learn more about Certified Internal Auditor of Pakistan (CIAP) course offered by Mirchawala’s Hub Of Accountancy. Welcome to our informative blog!
INTERNAL CONTROL SYSTEMAn internal control system comprehends the process and procedures through which management keeps track of employees and organizational activities, systems are used to ensure the safeguard of assets, create a trustworthy and sustainable environment, to avoid manipulation in financial statements and it helps in compliance of rules and regulations and to ensure effective governance and risk management within an organization. The internal control system incorporates both the
- Control environment
- Control procedures
CONTROL ENVIRONMENTThe term ‘control environment’ refers to management’s commitment within the organization. It comprises the overall attitude, actions, measures, and integrity towards the organization. Management should use clear strategies to deal with the identified issue. Management should consider implementing robust or strict consequences and punishments as part of enforcing control over the environment. It is also essential to maintain fairness and consistency. A clear presence of policies, procedures, and authority should be implemented, along with the management’s commitment to ethical behavior. Management should provide training and development to employees, which will help them follow the control system. Staff will be more willing to act on the control system if they have knowledge about why these controls are implemented.
CONTROL PROCEDURESThe term ‘control procedure’ indicates a set of steps or actions designed to manage, monitor, regulate, and supervise a particular process. Some examples are IRF ID, CCTV Camera, Password, Segregation of Duties, Budget Making, Lockers, etc Types Of Control Procedures Include: Administration: Administration control refers to the security and safety of an organization’s activities, like doors, lockers, etc. Accounting: Accounting control provides accurate accounting records and their results in accountability, such as recording transactions, balance sheets, and bank reconciliation statements. Discretionary: Discretionary control is subject to human discretion; it gives freedom and flexibility to an individual to control and make decisions based on their own judgement. Non-Discretionary Control: On the other hand, non discretionary control includes rules, procedures, and automated systems that cannot be overridden and do not accept individual judgement. Spam soap-Mnemonic to memorize 1: Segregation Of Duties: Distribute the work among the people, and don’t let one person dominate the accounting and finance work. For example, the chairman and chief executive officer roles should be operated by two different people. 2: Physical: Management should take some measures for the physical security of their assets, such as security guards, etc. 3: Authorization And Approval: A senior manager or a responsible person should authorise and approve all transactions. Managers should also set the limits for the authorization. 4: Management: Managers should have control through supervision, analysis, reviewing accounts, setting a budget, checking actual outcomes, and analyzing variance. 5: Supervision: Managers should supervise the operations and activities of the organization. It helps in reducing fraud, falsification, and errors in the organization. 6: Organization: Managers should create a clear organizational structure, which includes defining reporting lines and levels of authority, and they should also manage the responsibility for each role within the organization. 7: Arithmetic And Accounting: Managers should reconcile the bank statement to scrutinise the difference between the bank statement and the cash book. They should also compare the actual results with the budget to analyse variances. 8.Personnel: Managers should be more attentive when recruiting staff because staff can effectively contribute to the organization’s goals and values. They should also devote themselves to employee training and development.
What is Audit ? – Definition And MeaningAn audit is an assurance of engagement in which an independent individual shares an opinion on the subject matter against a specified set of criteria to raise the confidence of the user in the subject matter prepared by the responsible party. Components of an Audit 1: User: The one who wants to audit to achieve an objective. 2: Subject Matter: The matter on which audit activity is performed 3: Independent expert: the one who is an expert in auditing. 4: Responsible: party: the party against which we are performing an audit activity. 5: Specified Criteria: What You Want To Evaluate About The Subject Matter
Internal AuditThe organization fabricates an independent appraisal activity, which is executed by examining and evaluating the productivity and sufficiency of other controls. Internal auditors are professionals within the organization who are responsible for evaluating the organizational activity. Internal audit is a committee constructed by the non-executive directors. They want an internal auditor to scrutinise the business’s day-to-day management activities. Objective Of The Internal Auditor: 1: The internal auditor provides assurance to the audit committee and stakeholders that the business’s operations are effective and efficient. 2: Internal auditors also assess an organization’s risk management process. 3: Internal auditors ensure that business assets should not be used for employees personal interests. 4: Compliance with laws, regulations, and internal policies 5: They also detect and prevent fraudulent activities within an organization. 6: Internal auditors also provide recommendations on improving internal control and reducing fraud.
External AuditorsThe annual examination of the financial statements and records of an organization is carried out by a third party to ensure that the statement is true and fair and that it is properly Maintained. They help to assure transparency, accuracy, and compliance with accounting standards and legal requirements. External is an independent third party that shareholders hire to scrutinise the financial statements and accounting records and report to them that the accounts are accurate and reliable. External auditors are legally required by public companies and may be willingly conducted by private companies to build trust with stakeholders. External auditors are regulated by law; they have to follow the ‘International Accounting Standards’ and ‘International Financial Reporting Standards, and one financial expert is essential. The role of external auditor have been clearly defined by ACCA Global
FAQs (Frequently Asked Questions) on internal control systemQ1. What is the difference between an internal auditor and an external auditor? Ans. Internal auditors are an audit committee constructed by the board of directors to scrutinize the day-to-day activities of the organization. Whereas an external auditor is an independent third party that a shareholder hires to ensure that financial statements are true and fair, Q2. What are audit trails? Ans. Audit trails are sequential records of activities and events related to a process. Scrutiny of day-to-day transactions whereby the work of one person is proved independent of the work of another person. Audit trails provide accountability and transparency. Q3. Why is an audit important? Ans. An audit is important for several reasons, such as risk management, fraud detection, accurate financial statements, foreign investment, loan approvals, and taking corrective actions. Q4. Do internal control systems eliminate fraud? Ans. It is impossible to eliminate fraud, whether you have the finest internal control system or not. Fraud can only be minimized by implementing qualitative controls. Because of inherent limitations of the internal control system, such as poorly judged decisions, human error, and unforeseeable circumstances. Q5. What is the difference between preventive and detective controls? Ans. Preventive controls are designed to prevent errors from occurring before the fraudulent activities, i.e., antivirus and detective error help to detect and identify fraud and irregularities after the occurrence of fraud and irregularities, i.e., CCTV helps in detection. Q6. What is the relationship between internal control and risk management? Ans. Internal control systems and risk management are interrelated. Internal control systems help identify the potential for risk within the organization. Internal control systems are a key component of risk reduction. The preventative, detective, and corrective controls help reduce fraud. Q7. What is the role of senior management in maintaining internal controls? Ans. Senior management should be committed to creating a control environment within the organization; senior management sets the tone for the organization’s employees through their own behavior. Senior managers set the policies and procedures for the organization. Q8. What role does internal auditing play in evaluating the internal control system? Ans. Internal auditors play a crucial role in evaluating the organization’s internal control systems. They are responsible for risk management, examining controls, checking documentation, and checking the operational activity in the organization. Q9.Who teaches internal control system in Mirchawala’s Hub Of Accountancy ? Ans. This topic of business and technology falls under foundation exam of ACCA – FBT taught by Owais Mirchawala. In your later exams of ACCA you will get to know more about internal control system. Contact Mirchawala’s Hub Of Accountancy for assistance with your academic career -Written by Areesha Shahzed – an inspired ACCA students at Mirchawala’s Hub Of Accountancy
By author – “I am Areesha Shahzad. Halfway On My Journey To ACCA With The Guidance Of Mirchawala’s Hub Of Accountancy, I am currently learning the FMA, FFA, and BT from one of the most renowned teachers in the ACCA field . My leisure activity is blog writing to help others who are here to learn.”
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