What are the classification and techniques of Internal Control?

The nature of internal control is to establish preventive or control measures in an organization to provide reasonable assurance about the achievement of an entity's objectives. It follows the principle that key activities in the organisations should be processed by one person and be checked by another independent person. This prevents the occurrence of fraud and so deliberate attempts made by any insider may be withheld at once. Internal control can broadly be classified into two categories viz.: Accounting controls/financial controls, and Administrative controls. (1) Accounting controls Accounting controls comprise the plan of organisation and all methods and procedures that are concerned mainly with and relate to, the safeguarding of assets and the reliability of the financial information. They generally include such controls as the system of authorisation and approval, separation of duties concerned with record keeping and accounting reports from those concerned with operations of assets custody, physical controls over assets and internal auditing. Examples of each are (i) maintaining inventory is an accounting control whereas (ii) recording of visits by a salesman is the administrative control. Internal control relating to accounting system aims at ensuring that: the transactions are executed in accordance with the management's authorisation; all transactions are promptly recorded in an appropriate manner to permit the preparation of financial information and to maintain accountability for assets; the access to assets is permitted only in accordance with the management authorisation; the assets are reviewed and verified at reasonable intervals and appropriate action is taken with regard to the variances. It can safely be said that scope of internal control is much wider than that of accounting controls. Thus, internal checks, internal audit, quantitative controls, budgetary controls etc. can be said to be a part of the accounting controls, in so far as they deal with quantitative aspects. On a wider footing, accounting controls, operational controls, policy planning/review, reporting etc. can be said to be a part of internal control. (2) Administrative Controls A number of controls falling under operational controls can also be administrative controls. Examples of operational controls are: quality control, works standards, periodic reporting, policy appraisal etc. Administrative controls are very wide in their scope. They include all other managerial controls concerned with decision-making process. They are concerned with the authorisation of transactions and include anything from plan of organisation to procedures, record keeping, distribution of authority and the process of decision-making. They include controls such as time and motion studies, quality control through inspection, performance budgeting, responsibility accounting and performance evaluation etc. Administrative controls have an indirect relationship with financial records and the auditor may evaluate only those administrative controls which have a bearing on the financial records. Techniques of internal control are as follows: There should be clear division of the work. Segregation of the work should be in such a manner that the work done by one person is the beginning of the work for another person. There should be clarity of the responsibility. The work flow process be documented or standardized so that the staff may perform the work as suggested in the work flow chart. No single persons should be allowed to have access or control over any important business operation. There should be job rotation of the staff duties periodically. Staff should be asked to go on mandatory leave periodically so that other person may come to know if someone is playing foul with the system. Persons having the charge of the important assets should not be allowed to have access to the books of accounts. Periodical inspection of the physical assets be carried out to ensure its physical existence as well in good working condition. The valuable items like cash and others, by physically inspected and the periodicity should be at irregular intervals, so that the person under whose charge the assets are, cannot know in advance, when the inspection will took place and manage the affairs.