Internal Control Systems: Characteristics, Elements, and Evaluation Methods

Characteristics of an Internal Control System

An effective internal control system is designed to achieve several critical objectives:

• Safeguarding of Assets: This includes both physical protection (against theft, damage, etc.) and accounting protection (against errors, omissions, and fraud).
• Ensuring Accuracy and Reliability: To guarantee the accuracy and reliability of accounting transactions and financial records.
• Promoting Operational Efficiency: It must achieve greater efficiency in the use of company resources (material, human, and financial) during the development of all activities.
• Encouraging Adherence to Management Policy: Establishing a strong system of staff motivation and integration that encourages identification with and adherence to management decisions.

Essential Elements of Internal Control

The most common minimum elements required for a robust internal control system are:

1. A Plan of Organization: This plan must define and delineate responsibilities, ensure the segregation of duties, and facilitate coordination. A good system of internal control is based on the principle that each person has their responsibilities properly secured in order to fulfill their functions.

2. Strategic Planning and Budgets: These documents determine business objectives and quantify expectations. Deviations between actual and expected results must be subjected to analysis, and if necessary, the budget must be amended and/or the objectives reformulated.

3. A System of Licensing and Registration Procedures: Permits must be realized in written operating procedures, and accounting must have accountability plans that facilitate their development. Transaction records should be carried out using the best and most secure media (such as computer files), ensuring the segregation of the functions of authorization and registration.

4. A Channel of Useful and Periodic Upward Information: This channel allows for the exercise of timely decision-making. It is established through reports from the sections or areas responsible, directed toward management.

5. Qualified Personnel: The human factor must be sufficient both quantitatively and qualitatively. The efficiency of the entire internal control system would be compromised without trained and experienced personnel who are identified with the general policy, motivated by incentives and promotions, and supported by a continuous training and improvement plan.

Methods for Analyzing Internal Control Systems

The following methods are commonly used for the analysis and evaluation of an internal control system:

Descriptive System

This method involves leaving a detailed record and explanation of the characteristics of the system being evaluated, including: operations performed, sections or departments involved, personnel responsible for each area, documentary support, filing system, and accounting procedures.

Questionnaire System

This is the traditional method, consisting of a battery of standardized questions relating to the work area being audited. These general standards must be adjusted to the specific characteristics of the business (e.g., industry, commerce, or services).

Flowcharts

This method involves plotting the operating circuits within a control system based on the chronological movement of documents and records.