What is an internal control system? Why do businesses need an internal control system?

Your company has a good development orientation, a smart business strategy and you also have a team of skilled employees. That’s so great! But can you be sure that your ideas will be perfectly executed by everyone, that is, bring the desired effect and success? And most importantly, how to prevent things from happening? do deceitful, non-transparent employees? As a business owner, do you think it is necessary to set up an internal control system?

What is internal control?

The internal control system is essentially the activities, measures, plans, opinions, policies and efforts of all members of the organization to ensure that the organization operates effectively and achieves its objectives. reasonably set target. In other words, it is the set of all the things a company needs to do to get what it wants and avoid what it wants to avoid. The system does not measure results based on growth numbers, but only monitors how the company’s employees, policies, systems, and departments are performing and, if it remains the same, then Is it possible to complete the plan? In addition, establishing an effective internal control system will minimize the loss of company assets.

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Why do you need internal control?

A fairly common situation today is that the management method of many companies is still loose, when small companies are managed in a family style, while large companies decentralize operations to subordinates without the necessary supervision. full test. Both of these models are based on personal trust and lack regulations on cross-checking information between departments to prevent fraud. Establishing an internal control system is establishing a monitoring mechanism. where you do not manage by trust, but by clear regulations to: – Reduce the risk of potential risks in the business (inadvertent errors cause damage, risks that delay the plan, increase cost, product quality reduction, etc.), – Protect assets from damage, loss, loss, fraud, fraud, theft… – Ensure the accuracy of accounting and reporting data financial statements,– Ensure all members comply with the company’s rules as well as the laws,– Ensure optimal use of resources and achieve set goals,– Protect the interests of investors and shareholders and build trust with them.

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Indispensable elements of the internal control system

Depending on the type of activity, objectives and size of the company, the internal control system used varies, but in general, this system needs to have 5 components as follows: 1. Control environment:

Those factors of the company that affect the operation of the internal control system and that create the environment in which all members of the company are aware of the importance of the system of internal control. set. For example, managers’ perceptions of integrity and professional ethics, the need to organize a reasonable apparatus, and clear assignments and delegations, and the issuance of written regulations regulations, regulations, business processes… A good control environment will be the foundation for the effective operation of the internal control system.2. Measures to identify risks:

Regardless of size, structure, type or geographic location, any company can be affected by risks arising from internal or external factors. Therefore, the internal control system should include the identification of risks.3. Inside elements:

That is the management lacks transparency, does not respect professional ethics, low quality of staff, breakdown of computer systems, equipment, infrastructure, organization and infrastructure is not changes to keep pace with the development and expansion of production, high management costs, lack of adequate inspection due to distance from parent company or lack of attention…4. The external factors:

These are technological advances that change operating procedures; consumer habits about products/services; appearance of unwanted competitive factors affecting prices and market shares; new laws or policies…To avoid being damaged by impacts from internal and external factors, you need to regularly determine the level of existing and potential risks, analyze their effects, including frequency of occurrence, thereby mapping out measures to manage and minimize their harm. In addition, your company’s internal information and communication system needs to be organized so that it can be accurate, timely, complete, authentic, easy to grasp and reach the right responsible person. .5. Monitoring and appraisal factors:

This is the process of monitoring and evaluating the quality of the implementation of internal control to ensure it is implemented, adjusted as the environment changes, and improved upon defects. For example, regularly review and report on the quality and performance of the internal control system, evaluate and Monitor whether the management as well as all employees comply with the company’s standards of conduct…

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How does the internal control system work?

The internal control system is responsible for understanding the company’s management system, including formal or informal activities, in order to provide regulations and guidance on factors that can affect the company’s operations. business action. In a broad sense, internal control includes procedures for managing a company’s equipment or tools that control production, sales and distribution. Information of the person in charge of internal control is usually collected and aggregated from many different sources such as communication with the establishment staff, investigation through questionnaires, by fact, etc. Then they record the information. Preliminary information in the form of descriptive column chart, narrative or a combination of the two forms above in order to give a specific picture to serve the control work. Internal control department is a part of the internal control department. belongs to the executive apparatus, has the function to support the director of the company, supervise all activities in the company, ensure that all employees comply with the rules and regulations of the company. In addition, this department is also responsible for timely reporting the results of internal inspection and control and proposing necessary solutions and recommendations to ensure all safe and legal activities.

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Signs of instability of the internal control system

This is a particularly important issue. If you notice one of the following signs in your company’s internal control department, you need to spend more time correcting it:– No clear written operating procedures: The work is only operated according to “voice command”, when he remembers, he checks, sometimes he forgets.– When employees accept to work “without pay”. Maybe they are taking advantage of a loophole in the company’s management system to benefit themselves.– There is an overlap between departments, there is no exchange of information, when something goes wrong, The extrusion departments push the responsibility to each other.– Unsure about the company’s finances. This is perhaps the most ominous sign that your internal control system is malfunctioning. Immediately review the internal control system, if you feel insecure in the company’s financial revenue and expenditure. Even if you don’t know the company’s business operations profit or loss, even on paper sales contracts, financial documents still see profits.

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To make the internal control system really effective

In daily business, the process of cross-controlling the sales, accounting and warehouse systems is essential and inseparable. The sales department will be the place to agree on prices with customers ordering. To make this work convenient, you should clearly define the price bracket for the sales staff to decide on their own or submit it to the managing director. After that, the sales staff wrote the delivery note and passed it on to the storekeeper. On this slip, it is mandatory to have the signature of the head of the department or an authorized deputy in order for the warehouse keeper to release the goods and sign it. This form has three copies: the sales department keeps one copy to monitor and urge the debt collection; warehouse keepers keep track of the actual export and import; The third party is transferred to the accounting department to record books and track debts. On the part of managers in the company, they are responsible for establishing, operating and monitoring the internal control system to suit consistent with the company’s goals. For this system to work well, managers need to adhere to a number of principles such as: building a cultural environment that focuses on integrity, professional ethics along with clear regulations on responsibility, rights and interests; clearly identify potentially high-risk activities; any member of the company must also comply with the system of internal control; clearly define inspection and supervision responsibilities; periodically conduct independent inspection measures… In addition to establishing horizontal – vertical control regulations or cross-checking between the system of departments, many companies also set up an internal audit department and a Board of Supervisors with the task of detecting errors of management, checking contracts with correct procedures and conditions, checking treasury to know if money is being misappropriated… in order to prevent low levels. In large companies in the world, internal control is in charge of the chief financial officer, while in small companies it is the chief executive officer.