WHAT ARE INTERNAL CONTROLS?
Internal control consists of four interrelated components. These are derived from the way management runs an operation or function, and are integrated with the management process.
Effective components of internal controls are:
• Control Environment – The control environment sets the tone of an organization or company, influencing the control consciousness of its people. Control environment factors include the integrity, ethical values and competence of the entity’s people; management’s philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people
• Risk Assessment –Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed
• Control Activities – Control activities are the policies and procedures that help ensure management directives are carried out. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets, and segregation of duties.
An employee who opens mail and endorses checks should not handle cash receipts.
An employee who prepares a document should not approve that same document
An employee who handles cash receipts should not endorse checks, maintain petty cash, receive deposit slips or corrections from the bank
An employee who prepares bank deposits should not receive deposit slips or corrections from bank, verify cash receipts, maintain petty cash, or perform auditing functions.
An employee who distributes payroll checks should not process payroll
• Monitoring – Internal control systems need to be monitored – a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations.
The internal control definition – with its underlying fundamental concepts of process, affected by people, providing reasonable assurance – together with the categorization of objectives and the components and criteria for effectiveness, and the associated discussions, constitute this internal control framework.
WHAT CAN MY COMPANY DO?
Control activities include, but are not limited to, the following:
Implement segregation of duties where duties are divided, or segregated, among different people to reduce risk of error or inappropriate actions. No one person has control over all aspects of any financial transaction.
Make sure transactions are authorized by a person delegated approval authority when the transactions are consistent with policy and funds are available.
Ensure records are routinely reviewed and reconciled, by someone other than the preparer or person executing the transaction, to determine that transactions have been properly processed.
Make certain that equipment, inventories, cash and other property are secured physically, counted periodically, and compared with item descriptions shown on control records.
Provide employees with appropriate training and guidance to ensure they have the knowledge necessary to carry out their job duties, are provided with an appropriate level of direction and supervision, and are aware of the proper channels for reporting suspected improprieties.
Make sure that policies and operating procedures are formalized and communicated to employees. Documenting policies and procedures and making them accessible to employees helps provide day-to-day guidance to staff and will promote continuity of activities in the event of prolonged employee absences or turnover.
The above internal controls definition was developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) which is recognized by MultiBusinessSolutions, Inc.
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