Two Purposes of Internal Control

Internal controls are systematic measures an organization implements to control many aspects of the business. There are several purposes of internal controls, including to protect an organization against fraud, waste and inefficiency, and to ensure that accounting information is accurate and reliable. Internal control systems use five elements to achieve these purposes: control environment, risk assessment, control activities, information and communication, and monitoring.

  1. Protection

    • Protecting against fraud and waste is one of the main purposes of an internal control system. An organization achieves this by first starting with a good, effective control environment. A control environment refers to the company's integrity and ethical values. This environment is set by managers and owners and should reflect the organization's mission and philosophy. This environment sets the tone for all employees to follow. Once the control environment is set, companies implement policies to protect against fraud and inefficiency.

    Control Activities Used for Protection

    • In order to protect against fraud, a company performs a risk assessment, which helps locate areas of risk. Each discovered risk is prioritized, allowing the company to focus the most attention on the areas with the highest amount of risk. These activities are conducted for preventative purposes. A company, for example, separates work duties. For this purpose, the person receiving and posting payments received is not the person making the deposits. Another separation of duties is completed by having one person reconcile the bank accounts and another write out checks.

    Accurate Accounting Information

    • All components of internal control systems are interrelated. To ensure that accounting information is complete and accurate, organizations design controls. One reason this is important is so that the financial statements that are created at the end of each period accurately reflect the true state of the company's financial health. One way of accomplishing this is by promoting effective communication and information skills within the organization. Accounting workers must be given all documentation regarding transactions. For this to occur, open communication lines must be present.

    Activities to Promote Accurate Records

    • Common controls used to promote accurate records include developing an accounting manual that contains the policies and procedures for recording accounting information. Many companies require control activities, such as the use of authorization and approval forms for purchases and payments. The last element of internal controls is monitoring. Monitoring consists of evaluations, assessments and audits. These activities should take place often to ensure that the internal control system is working effectively.

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