Five Components Of Internal Control System

In order to deter fraudulent activities by both management and employee, many companies employ an internal control system. A system of internal controls is a group of processes and procedures in writing, that are put into place by the organization to achieve operational efficiency, effectiveness, reliable financial reporting and to encourage incorruptibility. One of the major leading authorities on the issue is an organization out of the United States called the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is a joint initiative of five private sector organizations, who provide thought leadership through the development of frameworks and guidance on enterprise risk management, internal control and fraud deterrence,

These five components are universally listed as the building blocks of an effective internal control system. Control environment is in general the environment that management creates with their actions, their attitudes and by leading by example. A clear focus on integrity, an honest commitment to discrepancy investigation and complete diligence in creating a system in which employees are able to complete their job duties and responsibilities. Risk assessment involves recognizing areas within the organization that have the greatest risk of inaccuracies or threat of loss. The greatest risks should receive the greatest amount of effort and monitoring. Monitoring and reviewing is an internal control procedure that should be implemented on a regular basis, giving management a clear picture of current requirements. Verifying that the appropriate procedures are in place and are being implemented accurately and efficiently is significant to the integrity of the system itself. Finally, control activities, these activities are what essentially occurs within the system, the actual processes and

If for example, during an audit it was identified that an adjusting entry was not recorded, an internal control activity for prevention could be a separation of duties. The employee who enters the information is separate from the person who reviews the reports. Another internal control activity is documentation. Having the employee sign off either physically or electronically that the task of entering the adjusting entries may be enough to assist in appropriately completing the task. Check lists and documentations may provide enough of a deterrent and serve as a reminder in order to get the job done