The purpose of internal control is to ensure the accuracy and completeness of an organization's financial reporting, as well as to safeguard its assets. There are six main components of internal control: control environment, risk assessment, control activities, information and communication, monitoring, and documentation.
Purpose of Internal Control
Control environment:
The control environment is the overall tone of an organization that set the expectations for how employees will conduct themselves. It includes factors such as the ethical values of the organization, the integrity of its management, and the Board of Directors' oversight.Risk assessment:
Risk assessment is the process of identifying and assessing the risks faced by an organization. This includes both external and internal risks. External risks are those that are beyond the control of the organization, such as economic conditions. Internal risks are those that are within the organization's control, such as poor internal controls.Control activities:
Control activities are the policies and procedures that are put in place to mitigate the risks identified in the risk assessment process. They are designed to ensure that transactions are authorized and recorded properly, that assets are safeguarded, and that information is accurate and complete.Information and communication:
Information and communication systems are essential for effective internal control. They provide the means by which information is disseminated throughout the organization and allow for communication between different levels of management.
Monitoring:
Monitoring is the process of assessing the effectiveness of internal controls. It includes ongoing activities such as reviewing financial statements, comparing actual results to budgeted results, and assessing compliance with policies and procedures. Monitoring also includes periodic evaluations of internal controls, such as audits.Documentation:
Documentation is important for all aspects of internal control. It provides a record of the policies and procedures that have been put in place, as well as a history of how they have been implemented. It also serves as a training tool for new employees.Conclusion:
Internal control is a critical part of any organization. It helps ensure that financial statements are accurate and reliable, and that operations are efficient and effective. The six components of internal control - control environment, risk assessment, control activities, information and communication, monitoring, and documentation and records - work together to create a system of checks and balances that helps organizations achieve their objectives.
Also Check: Advantages of Internal Control