8 Types of Internal Control

Internal Control is the policy and procedure company set to minimize risk, prepare proper financial statement, increase operational efficiency and effectiveness.

It is very important for the business to have a proper financial statement that enables the management to measure success and analyze the operation. Internal controls are placed to supervise the staff, management, and board of directors to provide reasonable assurance over the financial statements. It is also a tool for auditors to reduce audit risk when the company has proper internal control. It will reduce the audit risk at a certain level.

Every business operation will attach with risk and error. There is no business without the risk involved. Due to this issue, company needs to prepare internal control to prevent and detect the risks. Internal control will set a barrier to stop the risk of fraud from happening in the first place. It also helps to identify any error that already happens in the process and design proper solutions to correct such kind of issue.

8 Type of Internal Control

• Segregation of Duty

It is a very common control set by many companies. It aims to allocate a specific task to different people in order to prevent any fraud or error. The company believes that more people will be able to check/review the tasks in case any error incur. If we allow only a person/department to do a certain job, he will not be able to identify the mistake as he is the one who makes it in the first place.

Segregation of duty is also an effective control to prevent fraud. As more people involved, it will be hard to collude and commit fraud. When a person completes the job alone, it is very easy for him to commit fraud if he wishes to do. When more people involved in the process, he is highly likely to report any fraudulent activity. It also prevents people from committing fraud as they know that someone is watching their stuff.

• Physical Control

It is the control set to safeguard the company’s assets or confidential data. It includes the restriction access to the building, room, Lap, office, or any factory area. Only authorized people are allowed to enter this area. It will prevent any attempt to steal the asset or company sensitive information.

The company simply put the security guard to check if any unauthorized person tries to enter the area. They need to show the ID card or other documents to be able to enter. Some companies may use technology such as card swipe, password access, fingering scan, or even face detection.

At the same time, the company always keeps a record of the people who enter such kind of restricted area. It helps them to check the audit log in case something happens.

• Authorization and Approval

It is the control set to limit the right of employees base on their level of authorization. Small tasks will be authorized by low-level staff while the bigger task requires approval from higher management.

The level of authorization will help the top and middle management to focus on the important stuff. It will allocate the small task to lower-level staff, these tasks are considered as low risk so we should not bother with higher management.

It also prevents staff from committing fraud as the risky task will require approval from the others.

• Management Control

It is the control prepare and implements by the managements themselves. They need to involve in high-level work to control the whole entity. The management needs to take action when the company is facing with a serious problem such decrease in the sale, profit and so on.

• Arithmetic and accounting controls

It is the control set from the beginning of the accounting record. The company will assign individuals to record the different transactions into the accounting system. Revenue is recorded by using the revenue module which cannot use to record other types of transactions. It will apply to operating expenses, inventory, and other transactions. Each one has a different module of recording. For the high risk of transactions such as journal entries, it will have different producers.

This control will help to reduce some errors as it works as the filter to eliminate them in the first place.

• Humane Resource Control

Humane resource is a very important department as they are the ones who decide to recruit someone into the company, develop and keep the employee ability up to date. Company wants to achieve huge success, they need to set a strong control in the HR department.

Humane Resource control includes setting up strong criteria to recruit only talent people with good behavior. After they work for the company, HR need to access their capacity and working behavior. Proper training should be apply to them to improve their ability.

When one company full of talented people, it will help them to grow and achieve the main objective. It will improve other internal control as the people less likely to make any mistake. It also helps the company to prevent fraud when the employee has good behavior.

• Data Backup

In digital life, most of the company now stores most of the data in the electronic form on sever, cloud and many kinds of software. It is very convenience and easy to work. However, these data can be corrupted or error due to an accident or disaster. So it is very important to back up all the data in different locations, servers, or even offline. The backup can be made daily, monthly or manually base on the volume of data. It will enable the company to restore back to operation if anything happen.

• Reconciliation

Bank, accounts payable, accounts receivable and fixed asset reconciliation is the example of reconciliation. Accountants perform reconciliation between two sources of data which suppose to be the same. If they are not the same, there must be something behind them. So accountants need to do proper investigation.

It is the control that detect any risk which already happened. If we can find it early, we will be able to minimize the damage. And the other prevented control should be in place to prevent such kind of risk from happening again.