Components Of Internal Control In Nigeria

KUDIRAT TAJUDEEN

Principles of Accounting Mid Term Exam

Review of Chapter 7: INTERNAL CONTROL

Introduction

Internal control is an important part of any organization’s policies and procedures. It is a designed process put to effect by a company to establish reasonable assurance that the organization’s financial reports are reliable and are in accordance with laws, regulations and policies in line with generally accepted accounting principles (GAAP) and also safeguard the company’s assets from theft, unauthorized used or misuse and ensure the achievement of an organization’s objectives.

The need for internal control

Principal merchandising transactions has to do with buying and selling, it involves assets such as; cash, account receivables and

Components of internal control

There are five interrelated components of an effective internal control, which are; control environment, risk management assessment, information and communication, control activities and monitoring.

1. Control environments: This is created by the overall attitude and actions towards internal control and consciousness established and maintained by the management and employees of an organization. It is a product of management’s philosophy, style and supportive attitude, as well as competence, ethical values, integrity and morale of the organization’s people. The organization structure and accountability relationships are key factors in the control environment. Managers must make sure that employees are well trained and well informed of their duties. The elements of the control environment are;

• Integrity and ethics

• Management’s operating style and philosophy

•

Limitations to internal control

Every system or procedure has limitation, so does internal control. Internal control provides reasonable but not absolute assurance and confidence on achievement of objectives, reliability of financial reporting and compliance with law and regulations. Some of these are factors that may be responsible for the limitations:

Human error; As long as people are involved in control and procedures, internal control is vulnerable to human error. This may arise from carelessness, misunderstanding, distraction or fatigue, etc.

Cost-benefit consideration; Organizations have to consider this. If the cost of implementing or maintain a control exceeds the benefit, then that is an ineffective internal control.

Collusion; Employees who hold certain position may beat internal control system of separation of duty be colluding to fraud the organization. They can manipulate data, create false transaction etc to suit their own purpose and steal from the organization. For