Justification for an Internal Control System
Justification for an Internal Control System
Cynthia Kinney
ACC544/Internal Control Systems
June 27, 2011
Gary Godfrey
Justification for an Internal Control System
An internal control system is described as a way to control an organization better, minimize risk, reduce loss, and achieve goals. Two approaches, political and insurance, are used to justify the need for this type of system. Issues such as security valuation, asset allocation, optimization, and performance are considered with each approach.
The portfolio approach is a proactive approach to an internal control system. As with an investment portfolio, the key to this approach is to minimize risk while maximizing investment. Because risk is always inherent, this approach reduces the risk through the decision-making process. According to the Encyclopedia of Business and Finance (2006), an internal control system provides reasonable assurance in the achievement of objectives in the following categories:
Effectiveness and efficiency of operations
Reliability of financial reporting, and
Compliance with applicable laws and regulations
Use of current reporting gives management the ability to evaluate the mission and objectives of an organization. Risk can be assessed more often and reduced through strategic planning of management personnel. Periodic evaluation reveals risks such as fraud, concealment of funds, and misstatements before losses are incurred (Fulton, 2011). These reports also reveal if the organization is not in compliance with applicable laws and regulations governing accounting standards allowing changes to be incorporated prior to external audits.
The insurance approach is considered a reactive approach. Similar to the portfolio approach, the insurance approach also reduces risk. However, this approach is centered on the fact that business is risky and protecting the investment is necessary. In this manner, the internal control system is considered a risk finance tool. A business is
Cynthia Kinney
ACC544/Internal Control Systems
June 27, 2011
Gary Godfrey
Justification for an Internal Control System
An internal control system is described as a way to control an organization better, minimize risk, reduce loss, and achieve goals. Two approaches, political and insurance, are used to justify the need for this type of system. Issues such as security valuation, asset allocation, optimization, and performance are considered with each approach.
The portfolio approach is a proactive approach to an internal control system. As with an investment portfolio, the key to this approach is to minimize risk while maximizing investment. Because risk is always inherent, this approach reduces the risk through the decision-making process. According to the Encyclopedia of Business and Finance (2006), an internal control system provides reasonable assurance in the achievement of objectives in the following categories:
Effectiveness and efficiency of operations
Reliability of financial reporting, and
Compliance with applicable laws and regulations
Use of current reporting gives management the ability to evaluate the mission and objectives of an organization. Risk can be assessed more often and reduced through strategic planning of management personnel. Periodic evaluation reveals risks such as fraud, concealment of funds, and misstatements before losses are incurred (Fulton, 2011). These reports also reveal if the organization is not in compliance with applicable laws and regulations governing accounting standards allowing changes to be incorporated prior to external audits.
The insurance approach is considered a reactive approach. Similar to the portfolio approach, the insurance approach also reduces risk. However, this approach is centered on the fact that business is risky and protecting the investment is necessary. In this manner, the internal control system is considered a risk finance tool. A business is
References: Fulton, R. (2011, June ). Internal control systems as they relate to risk management. Retrieved June 25, 2011 from http://ezinearticles.com/?Internal-Control-Systems-As-They-Relate-to-Risk-Management&id=6297196 Internal Control Systems (2006). Encyclopedia of Business and Finance. Ed. Allison McClintic Marion. Gale Cengage, 2001. Retrieved June 25, 2011 from http://www.enotes.com/business-finance-encyclopedia/ internal-control-systems