Characteristics of internal financial control
Analysis of the major tasks and audit principles. The peculiarity of the concept and classification of internal financial auditing. The main types of monetary control and units engaged in it. Control measures in the framework of the material test.
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The desire to work with maximum economic efficiency makes many businesses today to reform as its internal organizational structure, so business management methods. However, even the most convinced and consistent "reformers" often have to reexamine such an important element as internal financial control.
The main objective of this control is to ensure the company's stable position and accumulate its resources for the implementation of strategic plans. Its first purpose is to avoid violations and abuses that almost inevitably arise where there is no systematic approach to deal with finances.
In General this type of internal control is a tool for analyzing the practices of companies in the financial sector. And it is possible not only to detect various faults and errors, but also to identify ways to optimize the activity of the company.
Key index, indicating a stable position of the company, is the level and the dynamics of its financial results. Good results in this area allow to assume that the company's activities are optimized, high capitalization and profits allows the company to develop further and to expect a positive financial results in future.
The relevance of issues related to the organization of internal control systems of the enterprise, increasing every year not only in international but also in domestic economic practice. The effective management of financial relations of the enterprise depends on its financial performance, competitiveness and, consequently, a place in the market. The most important function of management is internal financial control, which affects the process of decision making. The system of corporate financial control for the company is an important competitive advantage, allowing on the basis of timely and accurate information to make management decisions in a timelier manner and to respond to changes in the external environment faster than competitors. In addition, during crisis companies face the task of managing all types of costs even sharper, which is directly related to the development of the system of internal financial control.
The aim of this work is a comprehensive study of the concepts of internal control in the enterprise, the role and place of internal control system in the company and identification of its practical value for the effective functioning of the company as a whole.
This paper is based on the results of the study and analysis of legal documents, educational and thematic books, periodicals, conference proceedings and information from official websites of international organizations and consulting companies.
An optimal dynamics of financial results can be judged on the basis of growth of a number of indicators: return on equity, profitability, equity, rate of turnover of capital.
However, in order to more thoroughly assess the financial condition and financial position of the enterprise, it is required to monitor in details a variety of advanced options. In particular in the field of attention of the supervisors must be a technical and organizational level of functioning of the enterprise, the efficiency of utilization of production resources, main results and financial performance, product profitability, turnover and return on capital and solvency of the company.
However, for in-depth analysis, these parameters, as a rule, are not enough. Detailed financial control requires optional units of assessment: to monitor the financial results of the company, control of property and financial condition of the company, control of business activity and performance of the enterprise.
Many companies all over the world suffer from inefficient use of different kinds of resources - human, financial, material, lack of necessary information for making right decisions, unintentional and intentional distortion statements, outright fraud by staff and governors. Such problems can be avoided by creating themselves within the companies an effective system of internal control.
1. Objectives of internal financial control
The main objectives of the internal control of the institution are:
- to enforce departments and staff of their responsibilities, rights and duties in strict accordance with the requirements of Russian Federation legislation and official regulations of the workers
-to ensure the efficient use of public property, budget funds and non-financial resources to achieve the intended results
-to improve the efficiency and effectiveness of implemented by responsible institution its public functions
- to ensure an appropriate level of discipline, staff compliance with statutory duties, prohibitions and restrictions, timely resolution of emerging conflicts of interest
- ensure accurate reporting.
Organization of internal control (audit) is based on the following principles:
· compliance with the internal controls requirements of the legislation of the Russian Federation
· the continuity of the process of implementation of internal control
· the impartiality and objectivity of the actions of state officials responsible for the activities of internal control
· the professional competence of state officials responsible for internal controls
· the effectiveness and efficiency of internal control; responsibility for non-fulfillment (improper fulfillment) of the control functions.
Internal financial control is based on operational, financial, and structural levels. Depending on the type of institution, the goals can vary.
· Evaluation of the internal control system is an integral part of learning the specifics of the object of control. When assessing the internal control system, the risk of that the control system may not prevent or not to reveal the discrepancy between the established requirements is assessed. In this case, additional control procedures should be planned.
The information obtained on the basis of assessment of internal control will help to determine the level of confidence and the basis on which the required amount subject to execution of control activities and procedures control measures.
2. The concept of internal financial control
Internal financial control of budgetary institution is a system of knowledge about methods and techniques of financial control, it does not substitute institutional and state financial control, and as in practice, it is the kind of administrative activity, which is limited to the control of the accounting and measurement of financial (accounting) statements.
Internal financial control provides validation of financial indicators and development of proposals for optimization of economic activities to streamline costs of a fiscal institution.
3. Classification of internal of internal financial control
Based on the functions of internal financial control, three main types of internal financial control are distinguished:
* managerial (administrative) control
* financial control
* management and financial control
Managerial supervision is a process where managers influence employees in order to effectively implement organizational strategy. Thus their main task is to control the centers of responsibility. In other words, the system of reflection, handling and control of planned and actual information on entrance and exit of the center of responsibility should be created. Accounting of the centers of responsibility assumes differentiation of complete costs and costs of this center of responsibility.
Usually such centers of responsibility are distinguished:
* the income center where information on production amount is created, in a cash assessment - the income of the entity
* cost center where measurement of costs is performed
* the center of standard cost value - a kind of cost center where standard rates on cost elements are established
* profit center where the ratio between income gained by the center, and its costs is measured.
Creation of the centers of responsibility in large enterprises issuing diverse production allows to decentralize responsibility for profit earning and to increase overall performance of separate divisions as managers of the center are directly involved in business of this center and constantly compete among themselves. Also, here it is important to organize efficient system of managerial supervision that will allow the management of the entity to delegate the powers on cost management of the subordinate which can be guided in more detail in a situation on places. In this case the management carries out functions, such as control of actions of people in cost centers and in general behind financial and economic activities.
It is possible to perform these functions with the help not only managerial, but also managerial and financial control as relations of production are closely connected with financial relations.
In market economy when the most important purpose of each accounting entity is an achievement of efficiency of economic activity and receipt of the greatest possible profit, value of financial control increases. With this type of control receipt of reliable information, its compliance to a real situation in each link of a financial system are provided. By means of financial control the management of the entity can exercise effective financial and economic management, and owners are able to control managing directors of their equities, which allows to provide certain guarantees for attraction in economy private investments and personal means of citizens.
Implementation of financial control in the entity is also connected with detection of deviations from accepted standards and violations of the principles of legality, efficiency and economy of material resources expenditures at earlier stage. It allows to take the adjusting measures, to make guilty responsible, to receive compensation for the caused damage and to perform the actions directed on prevention of such violations in the future.
Thus, the processes of forming and use of financial resources act as a subject of financial control at the entities, and object of control act as governing bodies (Fig. 1)
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Fig. 1. Types of financial control and divisions performing it
Thus, in financial control system are included, first, the managerial and financial control exercised by all structural divisions of the entity, and, secondly, separate specialized divisions of internal audit, independent of accounting financial service. For example, the department of financial management headed by finance director and chief accountant controls financial flows of the entity. In particular, the accounting department is responsible for completeness and timeliness of reflection of economic transactions, correctness and reliability of creation of accounting records, conducting tax accounting and submission of the reporting to tax authorities. The department exercises control of financial assets of the entity, interacts with partner groups. Other departments of management are provided by department of marketing (controls and determines price policy, creates the cost of sales), production department (controls sales activities, production process material logistics), HR department (deals with issues connected with personnel management system organization, an assessment of candidates in case of employment, dismissal of employees), etc.
The most important sales term of internal financial control are financial information containing in accounting, statistical and operational records and also generalized financial performance reflecting various parties of economic activity. Financial information at the same time forms information base for managerial accounting, but is not limited by it. audit monetary control test
Thus, internal control:
* is carried out within the entity (or management structures) by its employees who are called usually internal auditors;
* will be organized according to the decision of management of the entity;
* is paid with enterprise assets.
Functions of managerial audit, whose purpose is studying of business transactions for development of recommendations about effective use of resources and optimal achievement of resulting effect also, can be assigned to internal controllers (auditors). Managerial accounting shall help top-management with accomplishment of their functions, a formulation of the correct policy of the entity.
It should be noted that the organization of services of internal control is optional to subjects of managing. If a ratio between effect from activities of internal controllers and costs for their content not for benefit of internal control, usually either measures for improvement of internal control are undertaken, or it is liquidated.
These were the units, of which internal financial controls consists. Here will be provided the classification of internal financial control by groups, according to the following criteria:
1. The form of manifestation:
the optional (external), carried out on the basis of the law the initiative (internal), not established by law, but which is an integral part of the financial management of the company.
2. Time of event:
the preliminary, which is to perform financial transactions and is essential to prevent financial abuse;
the current (operational) produced at the moment of making monetary transactions and financial transactions;
the following, conducted through a review and revision of reporting financial and accounting records and intended to assess the financial results of economic entities.
the complex - a set of measures for the verification of all financial activities of the economic entity and of all the financial indicators of the actual state of financial system and its compliance with the plan or the reporting;
the non-complex (thematic) - the control of individual elements of the financial system of economic entities.
4. In the sphere of financial activity:
the budget, tax, currency, credit (banking), insurance, investment, customs and control over the money supply.
5. Methods of implementation: check, survey, supervision, analysis of financial activities, observation (monitoring) and revision.
Depending on the period of the internal financial control can be divided into three levels:
- pre - audits of compliance with standards and procedures of the plan of financial and economic activities of the institution. He also budgeting, standard cost estimates, calculated indices. The specificity of the preliminary control is that it is a warning nature and aimed at the adjustment of the performance management planning agencies prior to the adoption of relevant indicators;
- current - carrying out routine analysis, examination, compliance, budget reporting and accounting, the implementation of performance evaluation (efficiency and economy) of public spending to achieve the goals, objectives and target forecast performance. Current control is the most common form of financial control. Its basis is the analysis of operational reporting on implementation of the plan of financial and economic activities and accounting documents;
- subsequent - quality audits training and reliability of budget reporting and accounting, evaluation of the efficiency and effectiveness of the use of public funds, as well as carrying out audits, inventories, and surveys. The next planned inspection activities are carried out on the results of the test object during the past reporting period (quarter, half year, year), analyses the causes of the actual deviations from the plan. The results of this analysis serve as the basis for the compilation of indicators for the next year, so the next and prior control is closely linked.
To address objectives developed system of internal financial control includes the following methods: risk assessment, control the level of subordination, monitoring, laboratory testing and investigation, which can be classified according to the levels of control as follows:
- Preliminary risk Assessment
- Ongoing Monitoring
-Control the level of subordination
Control measures in the framework of financial control are implemented through various methods, including such as: audit, check (subject to inspection), expertise and monitoring.
Revision is the study involving interrelated control actions for verifying the legality and correctness of performed financial and economic operations with budgetary funds and the correctness of their accounting and reporting, as well as the analysis and evaluation of the received information.
Revisions are classified depending on the amount of verification of documents on a continuous or selective depending on the direction and scope of an integrated, thematic, and counterclaims or cross-cutting.
Check (subject to inspection) is the study of specific issues (themes) activity of control objects.
Expertise is a methodical assessment of the object of control, intended to identify its strengths and weaknesses. The results of the survey are made of conclusions, containing recommendations to the object of control to eliminate identified during surveys of the violation of the budget legislation of the Russian Federation or other legal acts regulating budget relations.
Monitoring is the continuous or regular monitoring of the objects control, the analysis of their economic activities as an integral part of management to determine its effectiveness (performance) based on the approved normative legal acts of the techniques.
When carrying out control measures use standard procedures: inspection, supervision, request, confirmation, conversions, doing about similar procedures and analytical procedures.
Inspection - inspection of documents, records or assets. The inspection is used as the implementation of procedures on the merits (checking of documents substantiating and supporting giving transactions disbursements, verification of documents confirming the managerial decisions and other), and when performing tests of controls.
Monitoring - monitoring of process or procedure performed by the staff of the object. Typically, monitoring is used when performing tests of controls as a validation exercise of the established control procedures.
Inquiry search information from knowledgeable persons within in- or outside the object. The request can be as formal written request addressed on behalf of the controller to a third party (in the request sent on behalf of the inspected object must include a request to send a written reply to the address of the controller) and informal oral question addressed to managers and employees of the audited entity.
Confirmation - written response to a request for information about committed an object of verification operations, the amounts for these transactions. Confirmation is used when carrying out audit procedures on the merits.
Conversion - the verification of arithmetic calculations of the scanned objects or perform their own calculations.
Analytical procedures - analysis and evaluation of the received and/or verified economic and non-economic information. Analytical procedures used to conduct the research Institute of the audit procedures on the merits, and also when studying the subject of investigation.
The development of the system of financial control is carried out at Rea-implementation of the basic processes of control activities (planning control measures, immediate control related activities and reporting the results thereof) to achieve established goals and objectives.
Control measures in the budget institution can be carried out created a structural division of the internal control (audit) or by the Commission - the entities of the internal financial control of the institution. To objects of internal financial control institutions deposits include the structural units of the institution.
4. The purpose and function of internal financial control
The purpose of internal control is to help the leadership of the entity or governing body (including the government) to effectively performs their functions. Internal controllers are to guide the data analysis and evaluation, recommendations and other information obtained as a result of inspections. Using this information, management decides what measures must be taken to correct identified deficiencies (if they are found) and what areas there are for improving efficiency.
Financial control is a control system that provides a concentration of the control action on the highest priority areas of financial activity of the enterprise, it also has to detect deviations of actual results from those that are already provided and undertake operational decisions, ensuring its normalization.
The main functions of financial controlling:
· monitoring the implementation of the financial targets set by the planning system, financial performance and standards;
· measuring the degree of deviation of the actual financial results from prescribed;
· adjustment of individual goals and indicators of financial development due to changes in the external financial environment, financial market conditions and internal conditions of the economic activity of the enterprise.
5. The necessity of internal control
The need for internal control arises from the problems associated with "economies of scale", meaning that, firstly, the growth of the scale of production organization achieves by cost reduction due to the action of a number of factors (economies of scale); secondly, a negative scale effect, which consists of certain administrative difficulties associated with coordinating and controlling the activities of a large organization. With the growth of scale of operations management structure, separating the administrative staff and management levels, implementing work programs, are become more numerous. Multilevel management apparatus creates problems of information exchange, coordination of decisions, increases the acceptance of different levels of government decisions that contradict with each other. The difficulty is to control the various components of the control by the Central leadership, which increases the risk of erroneous decisions.
The company's management develops policies and procedures, but the staff is not always able to understand them or perform for one reason or another. Managers do not have sufficient time to check performance and often do not have the specific knowledge for this checking. Consequently, they are not able to detect faults and anomalies timely.
The task of managers is to manage the business, reaching goals in the most efficient manner. The success of this task depends largely on two factors: 1) does the manager have the necessary information for making correct management decisions; 2) whether there is effective control system implementation.
Managers themselves, for which business management is part of daily work, are not always able to objectively assess the situation. Even if the Manager believes that he effectively controls all the processes, he usually has no time and specific skills for gathering and structuring relevant information.
And here comes the aid of the Institute of internal control, which provides protection against error and abuse identifies areas of risk and possible elimination of future weaknesses or deficiencies, helps to identify weaknesses in control systems and to find rational principles of financial management of the enterprise. All these actions are accompanied by a discussion of the problems with the senior management of the company, of demand and supply which determine the procedure of internal control.
Internal control has information on all aspects of the company's activities and tools for synthesis and analysis of data, therefore, close interaction with internal audit, which enhances the efficiency of decision making by the management. Internal control is the objective source of information that helps the Manager to take a fresh look at things and assess the quality of managerial decisions.
Especially important internal control in that case is, if the company has remote branches or offices, where local leaders make their own decisions.
6. The goal of the enterprise management while organizing internal control system
The company's management, developing an effective system of internal control takes into account a variety of circumstances, including those circumstances which are within the task of the auditor evaluation of the internal control system of the enterprise. Management accounting requires a variety of information about all aspects of planning and conducting business. Accounting, about which the auditor issues an opinion to the management company, limited the legal framework of Laws and Regulations that contain requirements about objectives, system, methods, terms and forms of the accounting reporting of the enterprise.
When developing an effective system of internal control the company's management generally has the following goals:
1. Provision of reliable information for the successful management of the enterprise and the adoption of effective management decisions.
For example, when factors reducing demand for manufactured products appear, it is necessary to provide timely management information about the reasons of falling of demand for managerial decision-making about how to meet customer needs and coordination of activities in order to reduce costs.
2. Ensuring safety of assets, documents and registers of the company.
Tangible assets of the enterprise must be protected by a reliable monitoring system in order to prevent them from being stolen, usage with inappropriate purpose or accidental destruction.
Serious protection and control require intangible assets (receivables), documents (agreements and contracts) and ledgers (General Ledger and journals).
In accordance with the development and extensive application of computer systems require proper security, the amount of information stored on computer media.
3. Ensuring the effectiveness of economic activity in order to avoid unnecessary costs in all areas of economic activity and to prevent the inefficient use of all other resources. (Sometimes the cost of performing functions is outlined in the first two paragraphs and exceeds in figures the potential profit that can be obtained as a result of the proposed activities. Therefore, at first sight, the activities referred to in paragraphs 1 and 2 may seem ineffective. But the rejection of the implementation of measures to ensure reliable information and assets registers may lead to irreparable losses. The loss or theft of stakeholders' data about the quantity and prices of raw materials may reduce the competitiveness of the products.
4. Ensuring compliance with prescribed accounting principles. The internal control system should provide the necessary degree of assurance that the officers and employees follow the requirements and rules laid down by internal documents of the company.
5. Ensuring compliance with the requirements of Federal laws and other legal acts of the Russian Federation and local authorities in the implementation of financial and economic operations.
One of the main goals of the organization of internal control system of the company is to ensure the confidence of stakeholders.
The creation of an effective system of internal control in the company allows to:
* ensure the effective functioning, stability and maximum (according to objectives) development of the organization in multi-level competition;
* save and efficient use of resources and the capacity of the organization;
* promptly identify and minimize commercial, financial and other risks in the management of the organization;
* form adequate to modern ever-changing environment system of information management for all levels of management, enabling to adapt the organization to changes in the internal and external environment.
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