Question

Please explain the three basic components of internal controls.

Answer 1

There are five components of internal control system:

i) Control Environment:

Control environment consist of integrity and ethical values of an organization. It refers to the behavior of the company and its employee towards the internal control.

If the internal controls are taken seriously by them this leads to enhancement of robust internal control throughout the organization.

ii) Risk assessment:

Risk is a possibility that some event will occur and it will adversely impact the goal of the organization. In risk assessment process the most critical risk which is going to affect the business adversely is reviewed on a regular basis. It is ensured that how the entity is going to address those risks. It is basically an assessment for determining that how these risks will be managed by the entity.

iii) Control Activities:

These are the activities that helps in ensuring that how the management is going to ensure to mitigate the risk through its policies and procedure. Control activities are put in place in the all levels of the organization. Various automated and manual controls like approvals, authorization are put in place. An example of this activity is taking backup of IT data.

iv) Information and Communication:

Any information related to the controls must be communicated to the management in reasonable time. Management gathers information from Both internal as well as external sources .

v) Monitoring:

In this process the management ensures that the the controls which are put in place are working effectively and efficiently.

Only 3 components have been asked in the question I had given all five components for better understanding.

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