Principles of Good Internal Control System

Principles of Good Internal Control System

An effective or good system of internal control should have the following principles: -

1. Well-designed Accounting System: Internal control should provide for a well designed accounting system. The financial and accounting activities must be separated. For example, person who is responsible in handling cash (cashier) and the person who accounts cash (accountant) should be done by two different persons.

2. Competent Personnel: In any internal control system, personnel are the most important element. When the employees are competent and efficient in their assigned work, the internal control system can be worked and operated efficiently and effectively even if some of the other elements of the internal control system are absent.

3. Division of Work: This refers to the procedure of division of work properly among the employees of the organization. Each and every work of the organization should be divided in different stages and should be allocated to the employees in accordance with their skill and expertise.

4. Separation of operational responsibility from record keeping: If each department of an organization is being assigned to prepare its own records and reports, there may be a tendency to manipulate results for showing better performance. In order to ensure reliable records and information, record-keeping function is separated from the operational responsibility of the concerned department.

5. Separation of the custody of assets from accounting: To protect against misuse of assets and their misappropriation, it is required that the custody of assets and their accounting should be done by separate persons. When a particular person performs both the functions, there is a chance of utilizing the organisation’s assets for his personal interest and adjusting the records to relieve himself from the responsibility of the assets.

6. Supervision: Directors should review the company’s financial operations and position at regular and frequent intervals. Comparison with results for previous periods indicates discrepancies that call for further examination. Where budgetary control is in use, attention will be drawn to material variances and explanations required. From time to time, special reviews of particular items such as stocks, or the operation of the wages department, should be undertaken.

7. Sound Practice: Sound practices of administration require that established procedures, policies and delegation of responsibility should be open to all employees of the organisation. This helps in avoiding questions, attempts to shift responsibility for unsatisfactory performance etc.

8. Internal  Audit: Internal  audit  is a  part  of  the  whole  system  of internal  control.  It  should  operate independently of the internal check and in no circumstances; it should divert  any  one  of  responsibilities placed on him. It is the examination of  accounts   of  a   business      concern by its employees specially appointed for the purpose. It is an independent appraisal   of   activity   within   an organization   for   the   review of accounting,      financial and other business practices.