Concept of Internal Control

The Concept of Internal Control

One of the main functions of accounting is its protective function, which consists in ensuring the protection of the interests of the owner by creating a base for financial control. However, the implementation of a protective function requires the availability of controls. First of all, this is internal control.

Under internal control is understood a system of measures organized by the management of the enterprise and implemented at the enterprise with the aim of the most efficient performance by all employees of their duties in performing business operations. This implies not only and not so much the functioning of the control and audit unit of the organization, but the creation of a comprehensive control system, when it is the business of not only the auditor, but the entire management apparatus of the enterprise.

When developing an effective system of internal control, the enterprise administration sets the following goals:

• Providing business with reliable information
• Asset security
• Securing information
• Ensuring the effectiveness of economic activity
• Ensuring compliance of accounting with accepted accounting policies
• Ensuring compliance with the rules for the preparation and presentation of financial statements

Internal control at the enterprise consists of three elements:

• Control environment
• Accounting system
• Control procedures

Control environment
The control environment is the position, awareness and practical actions of the owners and management of an economic entity aimed at establishing and maintaining an internal control system.

Elements of the control environment:
• Style and basic principles of enterprise management
• Organizational structure of the enterprise
• HR policy
• Distribution of responsibility and authority
• Internal management accounting and reporting for internal purposes
• Preparation of financial statements for external users

Work management style
• Enterprise management must create an atmosphere of comprehensive control
• Conscientious and honest attitude to work should be educated by employees on the basis of an appropriate example and assessment by management
• Business leaders should develop proprietary “codes of honor”
• Company managers must demonstrate professional competence

Organizational structure
• A clear system of power and subordination (“one-man management”). Every employee should know to whom he is subordinate and to whom he can set tasks.
• Unambiguous regulation of employee liability. Each employee must understand what he is responsible for and by what criteria his performance is evaluated.
• A proper system of internal reporting with the aim of accurately accounting for the funds spent and the results obtained. Each employee should know when, to whom and on what issues he should submit a report
• Analysis of information flows

Ensuring compliance with the rules for the preparation and presentation of external financial statements.

The company must have fixed deadlines for preparing external financial statements (including tax). It should not be drawn up on the last day of the deadline for its submission. There should be time for checking these reports, their approval and signing by the management. The deadlines for the presentation of financial statements to external users are established by the accounting policies of the enterprise.