What Are the Key Components of Internal Control?

Every organization needs to work effectively and efficiently to be profitable. Internal control is one of those essentials that play a vital role in a company’s betterment and progress.

No organization can thrive without following the right strategies. Proper plans are set up to ensure that the organization is working in the way it’s meant to be. After implementing the correct methods and procedures for the organization, an auditor also validates the accurate implementation of these plans. 

Such plans are known as internal controls. Internal controls are aimed at achieving the core goals and visions of the organizations. That’s why the auditors audit these internal controls to ensure their reliability.

What is Internal Control?

Internal controls are plans and strategies made for a company to improve its progress and expand its reach. These plans help an organization solve its fundamental issues and provide a complete strategy to overcome its weaknesses.

Internal controls are run appropriately to ensure that an organization is working seamlessly and protected from frauds.

Once these programs are run, they ensure that the company faces no hurdles in its way of progression. All the operations within an organization are executed as per the rules and of internal controls.

Internal control’s first and foremost function is to prevent frauds and crimes from occurring in the company. Today, trillions and billions of organizations worldwide use internal controls to keep their organizations safe from harmful scams and security attacks.

What are the Perks of using the Internal Controls System?

The benefits of having an internal control system in an organization are not limited to only protecting itself from frauds or other cybersecurity attacks. However, they may include some other benefits like:

  1. Any essential data and assets of an organization are safe within an internal controls system.
  2. It avoids fraud and assesses the errors before they can cause disturbance in the organization.
  3. Internal controls system runs the organization’s business seamlessly and smoothly, ensuring that the desired results are achieved.
  4. It ensures the accuracy and authenticity of the existing internal accounting data and records.
  5. Internal Controls also help in maintaining the financial records and information of the company.
  6. They validate the quality of both internal and external reports.
  7. Using Internal Controls also ensures that everything is in accordance with the laws and rules of the internal controls system.
See also  Analytical Procedures in Auditing: What Is It and Why Is It Important

What are the 5 Main Components of Internal Controls?

There are five main elements of internal controls divided further into subcategories. They are:

  1. Control Environment
  2. Risk Assessment
  3. Control Activities
  4. Information and Communication
  5. Monitoring

These are the five main components that make up an internal controls system. All five elements play a vital role in scaling and improving the efficiency of an organization.

Control Environment

The control environment is one of the most essential and first components of the internal controls system. It is the base and foundation of the other four elements of the internal controls.

According to COSO, the control environment is the base that leads an organization to a successful path. It is defined as the particular and organized set of structures and strategies that give a proper way to execute internal controls successfully within an organization.

Furthermore, the control environment includes a lot of essentials that make it up, and some of them are:

  • Cultural values of an organization
  • Ethical Values
  • Management style and working environment
  • Human resources

Technically, the control environment relates to the entire company in different ways. It focuses on the cultural values within an organization and ensures that all the ethical values and their integration are being followed.

Control environment further aims that the management and human resource department follows the internal control policies timely and accordingly.

The control environment also ensures that the different departmental teams work coordinatively and corporate with each other in the organization. It also provides a complete way to operate the daily activities strategically within the organization.

See also  8 Types of Audit Evidence All You Should Know!

Risk Assessment

Risk assessment is the second component that makes up the internal controls system. Once the control environment is established and things start to operate in accordance with the rules and regulations, it’s time to assess the risks.

Risk assessment is essential as it helps to take precautionary measures. It prevents any issues and troubles from taking place in the organization. With risk assessment, auditors can analyze the problems and take actions directed towards the betterment and improvement of the company.

There are a lot of organizations, and they face different risks. Risks can be various in nature, objectives, and the industry. So it’s essential to analyze the risks based on their properties.

Whether risks are internal or external, risk assessment helps assess them to ensure the organization’s efficiency.

Control Activities

Control activities are the third element that forms internal controls. After the risks are assessed, auditors need to implement solutions and proper strategies to overcome those risks.

There are numerous control activities that auditors use against the risks to get rid of them. Some of the most common ones are:

  • Security measures
  • Verifications
  • Approvals
  • Organization of essentials
  • Reviews

Control activities make up new procedures and strategies to be equally divided among the staff members. After following and implementing the control activities, organizations grow vigorously because they are free of any risks.

Information and Communication

Information and communication are the next steps to success and seamless operations. This step is referred to as the transfer of the information regarding the control activities to the responsible authorities within the organization.

See also  What is a Walkthrough In An Audit? And Why Is It Important?

By delivering the information via communication with the relevant business departments, the aim is to ensure the accuracy of the implementation of control activities in a timely way.

If there is no communication with the right personnel, it would be impossible to implement the control activities. Without delivering the correct information and communication, control activities become useless.

Monitoring

After the successful implementation of the above four components, internal auditors review the results. They monitor the process and control activities to ensure everything is in progress.

Monitoring also helps to detect the issues that may arise in their internal controls. It allows the auditors to prepare reports and understand the deficiencies to find their solutions.

Conclusion:

Internal control is an auditing process with its main goal aimed at boosting the company’s efficiency. The internal controls system is made up of five main elements. They help to carry out the entire process more strategically and efficiently.

Every aspect, including control environment, risk assessment, control activities, information and communication, and monitoring, is essential. These need to be executed step by step to ensure the accuracy of the process.

In the end, auditors can analyze the company’s progress. Internal controls assist in identifying whether the company is in line with the proper rules and laws or not.