Internal controls refer to systems used by organizations to safeguard their assets and to provide accurate, reliable financial reporting. Internal controls are designed by the company for three main purposes:checking progress on operational goals, financial reporting and compliance objectives. To have effective internal controls, five interrelated, key elements must be present, according to the Internal Control-Integrated Framework of the Committee of Sponsoring Organizations.
View the five elements of internal controls. These are control environment, risk assessment, control activities, information and communication, and monitoring. These five elements all work together to ensure that the internal control procedures set up are working effectively. Each element must be present, and the procedures around the activity must be carefully planned and monitored.
Choose the internal control activity you want to check. Verify that all five elements are included within the procedures of this activity by beginning with analyzing the control environment. This refers to the work environment within your organization, the way it is structured and the supervision in place.
Assess risk. With each control activity, a risk assessment is conducted. This is done to locate potential problems and to focus on correcting those and reducing the risk.
Analyze the management control activities. This step is conducted in order to make sure that all processes used within the organization are necessary and have a purpose. Sometimes, within an activity, a business finds that there are several unnecessary steps being done. This costs the company extra money and could cause additional problems because there are more opportunities for mistakes than are necessary..
Assess the information and communication processes used for this activity. This consists of determining if the appropriate workers are getting the information needed to effectively do their jobs. This also includes ensuring that information is only shared with necessary workers and that there is limited access to certain types of information.
Perform regular evaluations. In order to ensure that internal control procedures are operating effectively, it is important to check them regularly, at least once a year. It is also important to have regular audits conducted from external auditing firms to also check how a system is functioning.