august2021 - 5

FEATURE
The Importance of Internal Controls
By Mary Girsch-Bock
THE USE OF internal controls is paramount to the success of
any organization. Put in place by management, internal controls
allow businesses to successfully achieve three objectives:
* Production of accurate financial reporting
* Compliance with all rules and regulations
* Efficient organizational operation
capability
Along with these three primary
objectives, internal controls have five
main components established by the
Committee of Sponsoring Organizations
(COSO) which provides guidance for companies
around the world. Known as the
COSO framework, these five components
include the following.
CONTROL ENVIRONMENT
Before any of the other components can
be examined, the control environment
must first be established. The control
environment examines the behavior
of top management and their ability
to implement the necessary controls,
looking at everything from the ethics
of an organization's top management to
their integrity in handling any problems
or issues that may arise, because top
management sets the tone for the rest
of the organization, things like human
resource policies and procedures, management
philosophy, and organizational
structure. Control environment also
includes participation of management
and board to ensure that
internal
controls are abided by, as well as how
employee responsibilities are assigned
and managed.
RISK ASSESSMENT
After the control environment has
been established, the next component
to consider is risk assessment. Assessing
the risks of a company is essential
since risks must be identified prior to
any control procedures being implemented.
Risks will naturally vary from
company to company, depending on the
organization itself, its current control
environment, or even a specific industry.
Both internal and external risks must be
identified so that a proper process can
be put into place to help mitigate the
identified risk.
CONTROL ACTIVITIES
The third component of internal controls
is control activities. This area includes
all policies and procedures that have
been put into place by management as
well as how those processes are carried
out. Similar to the control environment,
the control activities component looks
at how top management handles tasks
such as delegation of duties, transaction
authorization, asset protection, as well
as routine reconciliations. While it may
be impossible for a small company with
few employees to ensure that tasks are
equally distributed, it's still important,
that proper oversight measures be put
into place.
INFORMATION AND
COMMUNICATION
The fourth component is information
and communication. This component
ensures that the flow of information
within the company is completed both
timely and accurately. For example, if
communication between management
and staff is not completed promptly and
properly, it's probable that necessary
activities will not be completed in a
timely fashion.
MONITORING
It's important that every business have
adequate monitoring measures in place.
While managers can be tasked with
monitoring their employees, it's the
responsibility of upper management
to monitor any controls that have been
established. It's also upper management's
role to modify any monitoring
and control processes should the need
arise.
If all five of these components are
implemented and are operating effectively,
they can help ensure that an
organization will achieve its goals while
avoiding unnecessary complications
along the way.
WHY ARE INTERNAL
CONTROLS IMPORTANT?
Establishing and using the proper
internal controls is vital for businesses
of any size. While internal controls cannot
always prevent fraud, particularly if
the fraud is being carried out by upper
management, in normal circumstances
they can help in the detection of fraudulent
activity. Internal controls can also
ensure that financial statements are
prepared both timely and accurately,
while also addressing any assertions
made
in the
completed financial
statements.
Human error can occur even if internal
controls have been implemented.
However, with the appropriate internal
controls in place, it's more likely that any
errors made will be found quickly, and
http://mary.girschbock@cpapracticeadvisor.com http://www.CPAPracticeAdvisor.com
august2021

Table of Contents for the Digital Edition of august2021
