|Internal Control Procedures Lecture 03 |

OBJECTIVES OF INTERNAL CONTROL

According to the CoCo Report (Criteria of Control Board, Canada), the internal control system includes those elements of an organisation, (including its resources, systems, processes, culture, structure and know-how) which, taken together, support people in the achievement of the organisation’s objectives. These objectives may be grouped into three macro-categories: ▪ Effectiveness and efficiency of operations (including business objectives linked to business scopes, such as customer service, quality, safety and efficient resource Management); ▪ Reliability of internal and external reporting (including issues related to information gathering systems and the possibility of promptly making accurate decisions on the basis of such reporting); ▪ Compliance with applicable laws and regulations and internal policies.
For a comprehensive explanation of internal control, you should refer to AUS 402, paragraphs .01 to .29 inclusive. We have already seen, from AUS 402, paragraphs .15 and .16, that the objectives of an internal control system for an organisation are that:

a) the conduct of business is orderly and efficient b) irregularities are prevented as far as is possible, and detected should they occur c) assets are safeguarded from unauthorised use or disposition d) financial records and other relevant data bases completely and accurately reflect the entire operational activities of the entity and permit the timely preparation of financial information.

We shall now look at these more closely.

a) Orderly And Efficient Business Operations
In operating an orderly and efficient business, management must set down in writing the policies, guidelines and rules that employees are expected to follow. For example, the credit rating of all new account customers is to be assessed before any credit is granted.
To properly execute these policies, staff have to be qualified and suitably trained. The credit officer would have to be familiar with the various factors required to assess a customer's credit rating.
The employee's work should be monitored (or checked) to ensure that the policies are carried out correctly. In a small business, the manager or owner oversees major activities involving internal controls, such as credit control. In a large business, the internal auditor can take over the monitoring of the employee's work, although internal control remains the responsibility of management.
There are six indications for management, that a business is achieving its objectives: i) profits will be increasing each year ii) the business will be able to pay its debts on time without resorting to expensive forms of finance iii) there will be a minimum number of customer complaints about the quality of the product, service provided by staff, etc. iv) staff will be able to perform the work load with as few mistakes, interruptions or overtime sessions as possible v) all assets will be safeguarded against loss vi) all records will be up-to-date and accurate.

b) Prevention And Detection Of Irregularities
One management objective, assisted by an internal control system, is the prevention and detection of irregularities. Management normally seeks reasonable, rather than absolute, assurance that the objectives of the system will be achieved. Two factors they consider are:
• the cost-benefit criterion: the benefit will outweigh the cost of the system. For example, an expensive security system in a small milk bar would cost far more than the losses incurred from shop-lifting,
• the system should not seriously affect efficiency or profitability. For example, many businesses