Question

Respond to the following in a minimum of 175 words:

Internal control is a process that is designed to help firms reach their goals and objectives as measured with respect to maintaining reliability, operational efficiency and effectiveness, and consistent financial reporting. In addition, adequate internal control ensures mitigating risks and compliance with regulations and policies.

Explain the five components of internal control.

Answer 1

Solution

Internal Controls are the mechanism, rule, and procedures that implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.

COMPONENTS OF INTERNAL CONTROL

Control Environment Monitoring Communication and Information Control Activities Risk Management

1. CONTROL ENVIRONMENT

Control environment is the attitude toward internal control and control consciousness established and maintained by the management and the employee of an organization. It is a product of management’s philosophy, style and supportive attitude, as well as the competence, ethical values, integrity, and morale of the organization’s people. The organization structure and accountability relationships are key factors in the control environment.

Principles for the Control Environment

Ø Demonstrates commitment to integrity and ethical values.

Ø Exercises oversight responsibility.

Ø Establishes structure, authority and responsibility.

Ø Demonstrate commitment to competence.

Ø Enforces accountability.

2. COMMUNICATION AND INFORMATION

Communication is the exchange of useful information between people and organization to support decision making and support coordinate activities. Within an organization, information should be communicated to the management and other employees that help them to carry out their responsibilities. Communication also takes place with outside parties such as customers, suppliers and regulators.

Principles of communication and information

Ø Uses relevant information

Ø Internal communication

Ø External communication

3. RISK ASSESSMENT

Risks are event that threaten the accomplishment of objectives. They ultimately impact an organization’s ability to accomplish its mission. Risk assessment is the process of identifying, evaluating and determining how to manage these events. At every level within an organization there are both internal and external risks that could prevent the achievement of established objectives. Sometimes the management cannot prevent the risks from occurring. In such cases, management should decide whether to accept the risks, reduce the risks to acceptable levels, or avoid the risks.

Principles for Risk Assessment

Ø Specifies suitable objectives.

Ø Identifies an analyses risk.

Ø Assesses fraud risk.

Ø Identifies and analyze significant change.

4. CONTROL ACTIVITIES

This component is the tool that help to prevent or reduce the risks that can hindrance accomplishment of the organization’s objectives and mission. Management should establish control activities to effectively and efficiently accomplish the organization’s objectives.

Principles of Control Activities

Ø Selects and develops control activities.

Ø Selects and develops general controls over technology

Ø Deploys through policies and procedures

5. MONITORING

Monitoring is the review of an organization’s activities and transactions to assess the quality performance over time and to determine whether controls are effective. Management should focus monitoring efforts on internal control and achievement of organization objectives.

Principles of Monitoring

Ø Conduct ongoing and separate evaluation.

Ø Evaluates and communicates deficiencies.