Internal control procedures are designed to ensure the reliability of financial reporting, timely feedback on achieving operational or strategic goals, and compliance with laws and regulations. While internal control procedures can vary depending on the organization's needs, five key components form the foundation of any robust internal control system. These components are established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework:
5 internal control procedures?
Control Environment
This set of standards, processes, and structures provides the basis for internal control across the organization. It's influenced by factors such as the organization's ethical values, philosophy, and operating style, the way the organization assigns authority and responsibility, and the competence of its people.
Risk Assessment
Every organization faces various risks that can affect its achievement of objectives. Risk assessment involves a dynamic and iterative process for identifying and assessing risks to achieve objectives. It is about understanding what can go wrong regarding financial reporting, compliance, and other objectives and managing those risks.
Control Activities
These actions have been established to ensure management's directives to mitigate risks are carried out. Control activities can be diverse and encompass a range of manual and automated tasks. Examples include approvals, authorizations, verifications, reconciliations, and segregation of duties.
Information and Communication
Relevant information must be identified, captured, and communicated in a form and timeframe that enables employees to carry out their responsibilities. Effective communication must also occur broadly, flowing down, across, and up the organization.
Monitoring Activities
These are processes to assess performance quality over time and ensure that the findings of audits and reviews are resolved. Monitoring can be performed through ongoing or separate evaluations. It might include regular management and supervisory activities, comparisons, reconciliations, and additional assessments.
Effective internal control requires all five of these components to be present and functioning properly. If one component is weak, it can affect the entire system. Organizations continually evaluate and adapt their internal control systems as business conditions change, ensuring that the control activities remain relevant and effective over time.