Internal Control and its Components
Internal controls are methods and policies designed to prevent fraud, minimize errors, promoteoperational efficiency, and achieve compliance with established policies and procedures.A strong system of internal controls will help to bring the following benefits to the company:
ENEFITS OF STRONG INTERNAL CONTROLS
Ensure the accuracy of the company’s accounting data and financial reports;
Reduce the risks of fraud or theft against the company by third parties or employees;
Reduce the risks of unintentional errors by employees which could be damaging to thecompany;
Reduce the risks of non-compliance with the company’s policies and business processes;and
Prevent unnecessary risk exposure due to insufficient risk management.
The control evironment means the overall attitude, awareness, and actions of directors andmanagement regrading the internal control system and its importance in the entity.There are potentially many control activities, but they generally fall into five categories:1.
Adequate separation of duties2.
Proper authorization of transactions and activities;3.
Adequate documents and records4.
Physical control over assets and records; and5.
Independent checks on performance
Commitment to integrity and ethical values
: the effectiveness of internal controls cannot rise above theintegrity and ethical values of the people who create, administer and monitor them
Commitment to competence and quality
: a company’s control environment will be more effective it itsculture is one in which quality and competence are openly esteemed.
Independence, integrity and openness at the board of directors level
. An active and involved board of directors possessing an appropriate degree of management, technical and other expertise coupled withthe necessary stature and mind set so that it can adequately perform the necessary governance,guidance and oversight responsibilities is critical to effective internal control