Abstract:

Rouse (2001) defines internal control as business practice, policy or procedure that is established within an organization to create value or minimize risk. The objectives of the internal control are to safeguard assets, ensure the accuracy and reliability of accounting records and information, promote efficiency in the firm’s corporation, and to measure the compliance of the management’s prescribed policies and procedures (Hall, 2008). In the book of Internal Control of Small Business, CPA Australia (2008) lists the consequences of having poor internal control: fraud, bad decision for the business, wrong decision made by people ill equipped to deal with the situation, not taking appropriate action in time to correct errors, and not allocating resources of the business correctly or most efficiently.

Small businesses usually lack of resources (CPA Australia, 2008) and for this reason small business is more prone to fraud due to lack of internal control (Long, 2009). Pramono (2004), further argued some negative characteristics of small businesses in Indonesia. He found small businesses have inefficient scale, lack of business administration systems, and lack of business experience and lack of the application of technology. All of these have led to a growing awareness of investors and other companies to focus on stronger internal controls at the smaller, private companies (Long, 2009).

Among the internal control activities, revenue cycle receives the most attention. According to AICPA (2002), revenue cycle is the area of fraud and abuse. Therefore a strong and comprehensive internal control is required. Several researchers have focus on the revenue cycle, and mostly are in hospital industry (Ronald et al., Elizabeth, Rauscher et al, Daniel et al, Niedzwiecki). However, there are few that focus on small manufacturing industry.