INTERNAL CONTROL SYSTEM

Internal control represent one of the important element in managing an organization.

Without internal control, organizational leader will not know and feel sure what is they have
done or conducted, have this matching with the one which expected. Besides, with internal
control hence organizational leader obtain get commemoration if there is something that
endanger the continuity of company's life will happened. Therefore existence of internal control
system in modern management represent something that cannot be bargained anymore.
A company cannot fulfill its monetary obligation or reach its target if provided bad
information. So for this reason, organizational leaders should be able to make and maintain
correct internal control system so they can ascertain reliability and integrity of data. Because
many from internal control system that related to transaction process system, hence all expert of
system information and accountant play important role to ascertain sufficiency of controlling.
1. INTERNAL CONTROL SYSTEM DEFINITION AND CONCEPT
According to COSO Internal control system is all good component in the form of
process, element, activity, that strongly interrelated each other in functioning to ascertain all
activity that will do, doing, and done, have walked to head for organization.
According to is Tunggal ( 1995:1) is internal control system represent organization and
all method and also rules which co-ordinated in a company to protect properties, looking after
careful and until how far the accounting data can be trust?
According to ( Mulyadi 1997:165) Internal control system includes organization
structure, method, and criteria coordinated to take care of organization's properties, checked
reliability and correctness of accounting data, motivated efficiency and obeying of management
policy( Mulyadi 1997:165).
Internal control system according to PSAP is a process run by board of comisioner,
management and other personal in an entity which is designed to give adequate confidence about
attainment three faction of objectives, that is financial reporting reliability, operation efficiency
and effectiveness, and also compliance to regulation.
From the definition above internal control system control there are some basic concept as
follows:

Internal control system represent a process to reach specific-purpose

Internal control system is run by people. Internal control system not merely consisting of
form and guidance policy, it's but run by people from each organizational ladder, which

include: comissioner, management, and other personal

Internal control system expected can only give adequate confidence, non absolute

confidence
Internal Control System addressed to reach three faction of objectives which is related
each other, that is financial reporting reliability, compliance to regulation, and also
operation efficiency and efektifiveness.

2. INTERNAL CONTROL COMPONENTS

a) Control Environment.
Control environment determine company direction and influence awareness of
controlling management parties and employees. Control environmental can be formed by some
factors:
Integrity and ethics of management
According to Yusuf (2001:258), in determining the important of integrity and ethical
values among personal in an organization, official member of and top manajement have to hold
responsible in :Creating condusive climate by giving example, communicating to entire or all
employees, giving guidance of moral to all employees with bad moral background, lessening and
eliminating disingenuous motivation, impinge law, and any acts are not ethical.
Comitment of Competition
Comitment of competition includes education, experience, knowledge, skill and training
in giving assignation and development of organizational personal ability.
Organizational Structure
Organization structure represent framework concerning organizational ladder, authority
level and encumbering of responsibility and duty in reaching the target of organization in each
structure occupation level.
Role of the Board of Directors and the Audit Committee
Role of CEO and Chief Council have to be dissociated. Meeting all executive give
opportunity for director to study various issue without existence of management parties, and an
independent council chief is importance to facilitated kind of this discussion. Board Of
Comisioner have to make standard code of ethics that can be guidance for management parties
and staff. At least, ethical codes have to mention various issue like work conflict at others,
acceptance of present which able to be considered to be bribery, forgery of monetary data and/or
performance data, conflict of interest, political contribution, secretary of company's and client

data, sincerity in relating to internal auditor and also eksternal, and also independent Board of
Comisioner membership.Committee Audit

accountable for chosen and assign independent

auditor for ensure that annual audit conducted, to study audit report, and to ensure that
unefficiency have been overcome.
Phylosophy
Philosophy is basic beliefs about what should be done and not done in building the
organization. By instilling the philosophy of personal integrity required to build relationships
with members, suppliers and business partners.
b) Risk Assessment
Risk Assessmentrmeans howto treatriskmanagementthat has beenjudged. The treatment
ofriskcan bedone in variousways:to avoid, ignore,accept, ortransferedto other parties.
Oneriskwould be avoidedif toobig, so it does notbenefitif wetake it.On the other handtherisk
isnegligibleifsmallketerjadiannyalevel. Otherrisksmaybe reducedto a certain extent, by
improvingthe system, equipment orpersonal.Oneriskwould be acceptableifthere is no
longerattemptto do(usuallybecause ofgovernment regulationsthat must befollowed). Last
istransferedriskto third parties, suchas theanticipatedlossesmengansuransikanbuildingin case of
fire.
c) Aktivities Control
Control activities are the policies and procedures to provide assurance that the actions or
activities have been implemented effectively and efficiently. Control activities are the
policies and procedures that help ensure that management directives implemented. Control
Activities include several aspects:

Policies and practices in managing human resources

Managers have a responsibility to compensate and reward employees for performance
comparable to bring healthy practices. Control of human resources in the application for
cash receipts and payments include:
Bear employees who handle cash. Dependant involves the acquisition of
insurance protection against theft by employees.

 Rotating duties of employees and requiring employees to take leave. This is to

prevent an employee attempts to steal because they might not always hide their
dirty actions.
Checking the background completely. Some believe that the dose of the most
important business and cheap that can be taken to reduce employee theft and
fraud is a resource for the department
Information Systems Control overbusiness
Control over information management system is very important and can be divided into
two general groups, namely: general controls and application controls. General controls related
to the attention of the whole enterprise, such as control over the data center, enterprise databases,
systems development, and maintenance programs. Application Control ensures the integrity of
the system, such as application processing sales orders, accounts payable, and payroll
applications.
Control of physical assets and records
Physical controls mainly related to human activities that are used in the accounting
system. This activity can be completely manual, such as physical activity perpetually guarding
assets, or may involve the use of computers for mecatat various transactions or account updates.
Physical controls are not related to the actual logic kompyter doing accounting work. However,
this control is associated with human activity that runs the computer logic. In other words,
physical control is not related to the environment in which an administrative staff to update your
account with ink and paper
Effectiveness of Independence Verification
Verification Procedure is an independent audit to identify accounting errors and
presentation. Verification procedures can access the management of individual performance,
transaction processing system integrity and accuracy of data contained in the accounting records.
Verification time depends on the accounting system and the work under review. Verification may
occur several times in one hour or several times a day. In some situations, verification may occur
weekly, monthly, or yearly.
Some examples of independent verification include:
Reconciliation of total batch at some point during the transaction processing.
Comparing physical assets with accounting records
Reconciliation of various ledger accounts with the account controller

 Reviewing management reports (both produced sitem the computer or manual) that
summarizes the various business assets
Separation of Functions and Duties
Oneof the mostimportantcontrol activitiesis the separation ofthe employee's dutyto
minimizethe functionthat should not beput together.Segregationof dutiescan take a varietyof
forms, depending on a variety ofspecific obligationsto be controlled
For example,the purchasecan not bemade bythe Purchasing Departmentbutauthorizedby
theInventoryControlDepartment. Separation ofthis workistoprevent the purchase ofsuppliesthat
are notneeded byvarious individuals.
Authorization Transactions and Events
Transaction authorization is to ensure that all transactions processed by the system
information is valid and in accordance with the purpose of management. Authorization may be
general and specific. Authorization commonly given to the operational personnel to perform
routine operations. Examples of general authorizations are proes approve the purchase of
inventory from suppliers designated only when the inventory level falls to the reorder point set.
On the other hand, specific authorization decision relating to situational nonrutin associated with
the transaction. An example of this was the decision to increase the credit limit on the number of
customers in the normal. Authorization is usually the responsibility of the management.
Good documentation
The company must document transactions. First, the company should use the numbering
of documents, and all documents must be calculated. Numbering prevent transactions are
recorded more than once or not recorded at all. Second, the control system requires the employee
promptly furnish notice of the source document to the department accounting counting counting.
This ensures timely recording of transactions for accuracy and honesty of accounting records.
Documentation procedures in the application of the principle is to use the cash proceeds on
deposit (incoming mail), recording cash registers, and deposit slips.
d) Information and Comunication
Internal control systemmustconcurrentlyandinform

allinformation

relating

to

thecompany, as well asinforming thepidakoutside.Internal controlaimed at improvingthe

qualityofaccounting information systems. The qualityof accountinginformation systemsgenerated
willaffect

theability

ofthe

managementto

make

good

decisionsin

managingand

controllingeconomic resources(assets) andin preparingand presentingfinancial statements.

Whilecommunicationregardingdelivery

of

information

topersonnelwithin

the

companyandto outside partieshereto.Besides,the communicationalsoinvolvesthe provision ofa

clear understanding ofthe roles and responsibilitiesof eachindividualwith respect tothe internal
control structureover financial reporting.
e) Monitoring
Accounting to (Dep.Kopdan UKM 2002:170-190) the managementshould ensurethat
theinternal controlfunctionas intended. Monitoringisa process ofquality assessment ofthe
performance ofthe internal control structureof all time. Itinvolvesan assessment ofthe
designandimplementation ofcontrol operationsbytheright foranyperiod of time,todeterminethat
the systemof internal controlhas beenrun in accordance withthe desiredandnecessary
modificationsdue tochanges in conditionshave been made. This monitoringcan berealized
throughseveralseparate proceduresorthrough theactivity.
3. EXPOSURE OF WEAK INTERNAL CONTROLS
Internal control system as protector that protecting company asset from many of
undesirable event which attack company. All these cover the effort to illegal access to company's
asset ( including information), deception by personal inside and outside of company, mistakes
because employees do not competence, wrongness of computeringprogram,damage input data,
and wrong action like accessing null and void by computer hacker, and also computer virus
threathment that breaking bases data and program.
Absence or weakness of control is called exposure. Exposure debagai loophole in
protective meningktkan control enterprise risk financial loss or loss of unwanted events.
Weaknesses in internal controls can expose the company to one or more of the following risk
types:
a)
b)
c)
d)

The destruction ofassets(both physicalassetsandinformation)

Theft ofassets
Damage toinformation orinformation systems
Informationsystemdisorders

4. EFFECTIVENESS OF INTERNAL CONTROL SYSTEM

According to Handoko (1995:7) Effectivenessis the

abilitytodo

the

right

thingortoadjustsomething well. This includesthe selection ofthe most appropriatetargetand the

selection ofthe appropriate methodto achieve this goal.The effectiveness ofthe internal control

systemis definedas the ability ofthe internal control systemare plannedand implementedto be able
torealize thegoal ofthe reliabilityof financial reporting, compliance with lawsand regulations, as
well as theeffectiveness andefficiency ofoperations. The achievement ofthat goalis realized inthe
form oftheelements ofthe internal control systemin the management ofthe organization
effectivelyandefficiency.
5. LIMITATION OF INTERNAL CONTROL SYSTEM
There are threefactors thatmostoften limitthe successful implementation ofinternal
controlare the costincurred toimplementinternal controlsshould not exceed theexpected benefits,
human factors, and thesize ofthe business is run.
Implementation ofinternal controlsrequires fundingnot less.Therefore,the companysought
tocosts incurred toimplementinternal controlsdoes not exceedexpected benefitsthatthe company
continuesto benefit, rather thana loss.
The human factor is the most frequently encountered problems. The nature of human
greed and the increasing demands prompted him to earn more money even though in ways that
are not justified. As good as any system that is implemented is not effective if personal not run
properly. It may also happen that collusion among employees can reduce the effectiveness of the
implemented system.
Size run business also limit the effectiveness of internal controls. Small companies will
find it hard to separate the job due to lack of employees or to provide an independent internal
verification. This proves that there is no internal control is perfect.

6. ADVANTAGES OF INTERNAL CONTROL SYSTEM

a) Increased Credibility with Lenders & Vendors
Effective internal control instills confidence with lenders and vendors as they help to
preventunforeseen litigation, negative situations and/or business disruptions. Inaccurate reporting
and errors can be mitigated by implementing preventive and detective controls that can be as
simple as routine reconciliations. This results in adhering to debt and/or customer agreements,
thereby building credibility with both lenders and vendors as business continues uninterrupted.
b) Provide for More Timely & Accurate Financial Data for Decision Makers

Through the implementation of strategic preventive controls centered on the financial

reporting process, the companys key decision makers will be able to make better decisions. A
decision maker can only make decisions based on the facts and circumstances known to them. If
the facts and circumstances can be accurately presented in real time, this alone will help improve
the success rate on key decisions that can ultimately lead to a companys success or demise.
c) Create a More Efficient & Value-Added Audit
Auditors may be able to reduce substantive audit testing if controls are determined to be
effective. The reduction in substantive procedures will be realized in audit year one and even
more in audit years two and three when tests of operating effectiveness would not have to be
repeated, unless material changes have occurred to the business process or controls or a
significant risk is involved.1 This reduction in time on audit testing will allow for other valueadded procedures and recommendations to management, which ultimately can lead to a more
value-added and efficient audit engagement.

7. CONCLUSION
Fraud and abuse common in companies. So the need for a system of internal controls to
minimize the losses that will occur. By applying the components and principles of the company's
internal control, fraud is expected to be reduced and the company avoid losses and bankruptcy.
BIBLIOGRAPHY
Hall,
James

2004)

Accounting

Information

edition.TerjemahanDewiFitriasaridan Deny Arnos Kwary.Jakarta :SalembaEmpat

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www.depkeu.go.id

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