the importance scope and requirement of internal control in an organization accounting essay


This paper will research the importance, range and demand of internal control in an organisation for its operation viz. production, care and procurance every bit good as in coverage.

Issues that will be brought frontward here are:

The ignorance of why internal control is of import that lead to non conformity and higher hazard of misbehavior.

The ownership and duties of Internal Control – misconception that internal control duties are chiefly prevarications within Finance section merely.

The perceptual experience – decelerating down the procedure, punctilious, merely applicable to Finance

The beliefs that when we act in good religion and in good involvement of the organisation, internal controls are less of import and can be taken lightly.

The enforcement – which party should implement the control. How to exert “ bar is better that remedy ” in the event of non conformity

To make a civilization on internal control patterns within an organisation.


Harmonizing to Statement of Auditing Standard ( SAS 300 ) : [ . . . ] an internal control system can possibly be distilled into the whole set of controls, fiscal and otherwise, which enable direction to run an efficient concern, safeguard assets, protect against mistake and fraud, and fix accurate, complete and timely accounting records ( Auditing Practices Board ( APB, 1995a, parity. 20 ) .

When it is governed and complied to efficaciously, it can be used as a tool of fraud bar and advance better corporate administration every bit good as fiscal coverage process.


Internal Control range covers more than the fiscal facet since it is the criterion accepted manner for each organisation to execute their operation. It provides a way for members of the organisation to follow in executing their duty efficaciously. Thus the duty lies non merely in Finance section but the organisation as a whole.

Requirement and Administration

From the clip concern universe has been shocked with the autumn of ENRON in 2001, Internal Control demand becomes extremely expected. Since this clip, it is a demand for an organisation to execute good corporate administration and unwrap their pattern in their published fiscal statement studies.

Internal Control governs by many things within the organisation every bit good as by and large accepted guidelines, processs and Act

Internal: Internal Policy, guidelines and Standard Operation Procedure that usually created within an organisation based on their current operation and demand

External: Sarbanes Oxley Act 2002 is an act started in 2002 originating due the ill-famed Enron dirt in 2001. This act has been used globally as an act to regulate internal control. Though it is largely adopted by a Multinational Company, Malayan companies besides uses it as a guideline. In Malaysia, we have Malayan Code of Corporate Governance release by Finance Committee of Corporate Governance in 2001.


As mentioned above, the conformity of internal control governs chiefly by internal policy and guidelines but Sarbanes Oxley Act 2002 can be adopted as a conformity Act for internal control. This is chiefly usage by a transnational company.

Internal Auditor will move as the point to guarantee the activities was performed within the demand of each organisation. Internal Auditor will usually describe their findings to the audit commission of an organisation. Their major functions and duties were provided in the “ Institute of Auditors ” guideline which defines an Internal Auditor as an “ independent, nonsubjective confidence and consulting activity designed to add value and better an organisation ‘s operations.

It helps an organisation carry through its aims by conveying a systematic, disciplined attack to measure and better the effectivity of hazard direction, control and administration procedure ” .

Critical Issues


In some fortunes, internal control has been wholly ignored when executing the operation. This might go on in smaller organisations where it was said that there are non plenty forces to execute internal control demand. However, sometimes, bigger corporations accidentally overlooked this issue. Why? There are some related issues to reply this inquiry. One of them is “ empowerment ” . While authorization is non a bad move at all since it was adopted to heighten the battle of employee in the company, it still has to be done with much attention and observation. Empowerment encourage employee to take portion in the determination devising. In accomplishing it, giving extended authorization to certain employee will be ineluctable. In this instance, when internal control is ignored or taken lightly, there will be higher chance of fraud and white collar offenses.

Most ill-famed universe fiscal dirt involved individuals with higher position and respectable degree in the society. Why is this go oning? This is the authoritative illustration of authorization gone incorrect. Authorization has given them higher authorization concern determination devising in their organisation therefore it may take to the enticement to do determination for their ain personal benefit. One might state this is more related to Ethical motives and Moral instead than internal control but internal control is a mean to “ forestall ” or cut down these hazards. A good internal control combined with higher ethical value will give a better consequence in forestalling concern fraud. Hence, why sometimes it has been ignored and overlooked?

From the article entitled “ ENRON: Learning the Lessons ” by Joanna Sze published in Akauntan Nasional issue March 2002, it was stated by the SC Chairman at that clip Datuk Ali Abdul Kadir that Enron-style dirt is improbable to go on to Malaysia due to our different accounting criterion than America ‘s. What about BMF dirt? Though it is an obvious mark of accounting profession failure, are they the lone party at mistake here? The article still insists on taking equal steps in executing its operation. What is “ equal steps ” in that affair? There is no usage to shout over spilt milk but how to forestall the spilt in the first topographic point? Is it merely the responsibilities of accounting profession to forestall this fiscal dirt from go oning?

Misconception of ownership and duty

Though Internal Control is of import for fiscal coverage, corporate administration and fiscal statement revelation, its ownership range covers activities beyond fiscal coverage. It largely covers the operational and direction activities in each organisation. As such, the duty to move harmonizing to the conformity lies to all members of the organisation. However, this fact has ever being misunderstood and ignored in an organisation whereby it was deemed that internal controls are merely applicable to Finance section since it is under the legal power of “ hearer ” and fiscal coverage revelation demand.

Many members of the organisation will assume that their duty does non include the demand to follow to the internal control processs. They will disregard this function when executing their norms in the organisation. For them this has nil to make with them. Members of the organisation needs to be educated to be cognizant that internal control process related to each activity in the company, therefore the duty of conformity prevarications on them. To educate them, they have to cognize the importance of internal control every bit good as its conformity.


Some feels that these processs are a reverse and fuss for them to execute their responsibilities in a timely mode. Since most internal control processs concentrating on inside informations, sometimes it does take a long manner to execute one peculiar occupation. When something need to be performed in a short clip,



Culture embedded

Actual Scenario

Pressing buying demand – trading off internal control demand with net income devising and abusing of state of affairs

In first illustration, a works experienced a failure in one of its equipment. The harm was repaired but it requires pressing replacing as the failure will ensue to merchandise loss therefore a decrease in net income. Normal procurement process requires 1 month of tendering and blessing phase, 2 hebdomads of presenting and another 2 months of fiction – totaling to 14 hebdomads continuance. Single sourcing cuts the procurement phase and reduced the fiction phase to 1.5 months – numbering to merely 8 hebdomads. The works direction decided on option 2 on the justification that net income will be reduced as a consequence of loss of merchandises. Is internal control being sacrificed for net incomes? Is this a echt instance of demands to cut corners or was justification made to accommodate the state of affairs? In this sort of state of affairs, one organisation must hold a specific guideline to manage “ pressing ” petition so that it is can be objectively justified

Refusal to admit and follow

Literature Review

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