A Checklist for Ways to Assess Internal Controls

A Checklist for Ways to Assess Internal Controls

Internal controls refer to the protections that secure the financial information and business operations of a company. Typically, it is the business owners’ responsibility to develop and apply internal controls in their organisation. To assess the efficiency of those controls, business owners may conduct external or internal audits (Also see The Audit Objective of External and Internal Audit). Usually, this assessment complies with a standard process that measures the financial information and business operations of the company. Most companies would employ individual professional accountants or an independent audit firm in Johor Bahru to assess their internal controls by complying with a checklist.

Test the Internal Controls

The auditors can do this by assessing operational information of the company using appropriate audit strategies. Usually, there is a close relationship between the testing of internal controls (Also see What Is Reasonableness Test?) and the accounting and finance department of the company. Auditors will choose some samples of information and test them against the accounting standards or the company’s SOP. By doing so, the auditors can make sure that the staff do not abuse the financial information of a company by perpetrating embezzlement or fraud. For some small business owners, they need external audits to safeguard financing from their investors, lenders or the bank. This is because the audit opinions of external auditors tell the investors, lenders and banks that the company has been implementing internal controls to protect its financial information.

Observe and Review Business Processes

In general, the auditors and the managers or business owners will choose several crucial operations to observe. In both external and internal audits (Also see Interim Audit and Its Advantages), sampling is a common audit procedure. Auditors will pay more attention to the processes which contribute to the most considerable portion of the business production as these processes may be more susceptible to abuse or frauds. Thus, observing a company’s internal controls on the spot enables the auditors to identify the efficiency of those controls.

Interview the Company’s Management

Interviewing the management helps the auditors in understanding the mindset of the managers and business owners. In the interview, auditors may ask questions such as the reasons and purposes of creating particular internal controls, the corrective actions the company takes when there is a control violation, as well as whether the managers know the objectives of setting up those controls. These questions help them to identify to what extent the business owners and managers understand the frontline operations of the company. Managers who always do not involve themselves in the process of establishing or assessing internal controls may indicate that there is a slack environment which increases the probability for the employees to abuse the company’s operation.

Interview the Staff

This is a crucial process in the evaluation as auditors may know how well the workers are trained for their job from the interviews. Also, the interviews help in revealing more details or information on how well the managers and business owners have educated their staff about the importance of ensuring the quality of business operations. The questions that the auditors may ask the employees include their job scope, the ways they protect the financial information and business of the company, the personnel who is in charge of inspecting the work they have completed, and whether the management has given them a manual that summarises the company’s SOP.