How to set internal control system in business?
Posted Date: 07-Nov-2012
Here in this article I have explained about internal control system of business concern. Why it is necessary to set internal control system? How to set? What are the points to consider? All points are discussed here.
In the business process accounting is necessary and for accounting process or for good accounting process internal control system is necessary. Internal control system means, in simple terms we can say that system of accounting should be set in the business so that accounting process and accuracy of accounting can be controlled or checked internally. It is important with view point of audit also because any accounting errors and noncompliance of law will be directly sort out by accounts department itself, so that query in the auditor's report can be prevented. As per audit term meaning of internal control system is, bifurcation of authority and duties without appointing superior authority among employees in such way so that work of one person is checked by other person to prevent errors and single person is not allowed to carry entire aspects of the transactions from its origin to its ends to prevent frauds.
Points for good internal control system
In the accounts department any employee should not allotted whole responsibility to carry accounting. That means more than one person should be work to record transaction of same kind. For example – to record banking entries in the books of account, Mr A should have authority and duty to maintain bank book and Mr B should have authority and duty to prepare bank reconciliation statement. Because of this system if any mistake is made by Mr A will be caught by Mr B and the same will be rectified at initial stage without creating big issue.
After recording accounting entry in the system, it is also required to maintain manual record in the file which shows authenticity of transaction. If we continue with above example even if Mr A and Mr B have authority to record bank transaction, to check correctness of entry there should be authorised person who will sign vouchers which are generated for accounting of transactions. To sign these voucher there is also requirement of internal control and that can be established by this way, there should be three requirement of three sign in each voucher one is who have prepared, one who check correctness of accounting and another who authorised transaction. Because of this even if any mistake is made respected person can be held liable for same.
For accounting of purchase there should be following internal control system will give the best result.
Proper purchase order should be issued after review of quotations from the different suppliers with authorisation of respected department.
Purchase invoice should be received from the supplier party and the same should be check that whether it is as per purchase order or not in terms of rate, quantity and standard etc. If not then debit not should be issued immediately.
When actually goods delivered by party, delivery challan should be received and when it come to the factory premises of at delivery address, goods receipt note should be prepared by the person who have taken delivery. At that time quantity, quality and weight should be verified. Copy of both weight and inward or goods receipt note should be given to purchase department. It any short receipt of goods is there then debit note should be issued.
Payment should be made according to terms. Means it should not before credit period. When actual payment is made, all above documents purchase order, bill or invoice, GRN or inward, delivery challan and debit not and credit note (if any) should be attached with voucher and it should be given to person who have authority to sign cheque for payment.
Statutory payment and return should not be done by the person who records the transaction of that area. For example – sales tax or VAT payment and return should not be filed by person who records sales transaction.
Cashier should not allow to record and authorised transaction for which payment is made by himself. There should be specific limit according to nature and scope of business for cash on hand, excess receipt should be immediately deposited in bank account. It is not at all advisable to made more transaction in cash. Even if it is required because of nature of business, limit for approval of transaction should be decided. For example – payment in cash to any party can be made by cashier up to amount of Rs.500 if proper evidence for expense is available but for more than Rs.500 payment in cash there should be specified person who will authorised such payments.
These are some points which will help for set up good internal control system but only setting up internal control system will not generate good result. To get output of system it requires implementation as much as possible. For big concern and companies where nature of business itself requires high internal control system, draft system should be prepared and it should be implemented on trial basis which will also help to get proper and accurate system.
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Internal Control System
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N K Ravishankara
ISC Technologies, Kochi - India. Copyright © All Rights Reserved.