The environment in which internal control operates has an impact on the effectiveness of the specific control procedures. The control environment means the overall attitude awareness and actions of directors and managements regarding the internal control system and its importance in the entity. A strong control environment, for example, one with tight budgetary controls and an effective internal audit function, can significantly complement specific control procedures. However, a strong environment does not, by itself, ensure the effectiveness of the overall system of internal control. The internal control environment may be affected by :
- Organisational structure : The organisational structure of an entity serves as a framework as practicable, to preclude an individual from overriding the control system and should provide for the segregation of incompatible functions. Functions are incompatible if their combination may permit the commitment and concealment of fraud or error. Functions that typically are segregated are access to assets, authorisation, execution of transactions, and record keeping.
- Management supervision : Management is responsible for devising and maintaining the system of internal control. In carrying out its supervisory responsibility, management should review the adequacy of internal control on a regular basis to ensure that all significant controls are operating effectively. When an entity has an internal audit department, management may delegate to it some of its supervisory functions, especially with respect to the review of internal control. This particular internal audit function constitutes a separate component of internal control undertaken by specially assigned staff within the entity with the objective of determining whether other internal controls are well designed and properly operated.
- Personnel : The proper functioning of any system depends on the competence and honesty of those operating it. The qualifications, selection and training as well as the personal characteristics of the personnel involved are important features in establishing and maintaining a system of internal control.
It is clear from above that internal control means not only internal check and internal audit but it encompasses the whole system of accounting as well as non-accounting controls established by the management in order to carry on the business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records. It also follows that a good system of internal control should comprise among other the following;
- the proper allocation of functional responsibilities within the organisation;
- proper operating and accounting procedures to ensure the accuracy and reliability of accounting data, efficiency in operation and safeguarding of assets;
- quality of personnel commensurate with their responsibilities and duties; and finally
- the review of the work of one individual by another whereby the possibility of fraud or error in the absence of collusion is minimised.
Further, it is clear from the definition that the scope of internal control can be extended beyond accounting and financial matters. However, financial and accounting controls primarily concern an accountant; and the other administrative controls installed by the management may have only an indirect significance for him. Non-financial control may include quality control of the products, plant maintenance programme, operating reports, statistical analysis, personnel training programme, etc. Accounting and financial controls include budgetary control, standard costing, bank reconciliation, selfbalancing ledgers, periodical operating statements, internal auditing, etc.