Internal control is an interlocking set of activities that are layered onto the normal operating

procedures of an organization, with the intent of safeguarding assets, minimizing errors, and
ensuring that operations are conducted in an approved manner. Another way of looking at
internal controls is that these activities are needed to mitigate the amount and types of risk to
which a firm is subjected.

Internal control comes at a price, which is that control activities frequently slow down the
natural process flow of a business, which can reduce its overall efficiency. Consequently, the
development of a system of internal control requires management to balance risk reduction with
efficiency. This process can sometimes result in management accepting a certain amount of risk
in order to create a strategic profile that allows a company to compete more effectively, even if
it suffers occasional losses because controls have been deliberately reduced.

A system of internal controls tends to increase in comprehensiveness as a firm increases in size.

This is needed, because the original founders do not have the time to maintain complete
oversight when there are many employees and/or locations. Further, when a company goes
public, there are additional financial control requirements that must be implemented, especially
if the firm's shares are to be listed for sale on a stock exchange. Thus, the cost of controls tends
to increase with size.

Internal control comes in many forms, which include the following:

 A board of directors oversees the entire organization, providing governance over the management
team.
 Internal auditors routinely examine all processes, looking for failings that can be corrected with
either new controls or tweaks of existing controls.
 Processes are altered so that more than one person is involved in each one; this is done so that
people can cross-check each other, reducing fraud incidents and the likelihood of errors.
 Access to computer records is restricted, so that information is only made available to those people
who need it to conduct specific tasks. Doing so reduces the risk of information theft and the risk of
asset theft through the modification of ownership records.
 Assets are locked up when not in use, making it more difficult to steal them.
 A key concept is that even the most comprehensive system of internal control will not entirely
eliminate the risk of fraud or error. There will always be a few incidents, typically due to
unforeseen circumstances or an exceedingly determined effort by someone who wants to
commit fraud.

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