May 26, 2015
Internal controls are policies and procedures put into place to ensure ongoing reliability of accounting systems. Some main functions of internal controls are to safeguard Company assets, detect errors, and prevent fraud or theft. Internal controls also promote efficient and effective operations. Without accurate and reliable records, executives, business owners, and management cannot make knowledgeable financial decisions to accomplish Company goals and objectives.
There are five components of internal controls:
- Control environment – This is the tone set by management. It provides discipline and structure through enforcing ethical values, assigning authority, responsibility, and accountability.
- Conducting risk assessment – Involves the identification, analysis, and management of business risks (changes in personnel, operations, etc.).
- Information and communication systems – This supports the identification, capture, and exchange of information in a timely useful manner; processing of transactions from start to finish and communication of roles and responsibilities involved.
- Monitoring – The assessment of the quality of internal control performance over time, by assessing the design and operation of controls on a timely basis and taking the necessary corrective actions, management must monitor controls to determine whether they are operating as intended.
- Existing control activities – The policies and procedures which help ensure that management directives are carried out and that necessary steps to address risks are taken; such as authorization of transactions, timely and appropriate performance reviews, segregation of duties.
Companies strive to achieve reliable financial reporting, efficient operations, and compliance with applicable laws and regulations. This framework is here to help business owners measure and review operational performance by setting ethical and safety standards. Do you have peace of mind that your company is running at its greatest potential?
By: Aubrey Forche, Staff Accountant
Categories: Audit & Accounting