Andres, Rebecca Paula F.

BSA 4 BLOCK 4
A149
What are the 5 essential components of Internal Control and explain each.
Each organization’s internal control framework should consist of 5 components:
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring
1. CONTROL ENVIRONMENT

The control environment sets the tone of an organization, influencing its people's control
consciousness. It serves as the foundation for all other internal control components, providing
discipline and structure.

2. RISK ASSESSMENT

This component is used to identify and analyze risks that may prevent a company from meeting its
goals. Internal and external risk factors may be present. Identifying risks correctly will enable
management to determine how to mitigate and manage these risks. Changes in an organization,
such as staffing, new policies, new software applications, new regulations, and so on, can all have an
impact on an organization's risk assessment.

3. CONTROL ACTIVITIES

These are the policies and procedures that aid in the implementation of management directives.
Segregation of duties is one of the most important control activities. Different people should be in
charge of authorizing transactions, recording transactions, having custody of assets, and performing
comparisons/reconciliations. For example, the person in charge of hiring employees should not also
be in charge of paying them, as this increases the likelihood that a ghost employee will go
unnoticed. If this isn’t possible, management needs to assess where other controls can be
implemented to compensate for the overlapping responsibilities. This will help organizations to
better identify any errors or irregularities in a timely manner.

4. INFORMATION AND COMMUNICATION

This component is concerned with the timely identification and transfer of pertinent information to
allow personnel to carry out their responsibilities. For example, timely financial reporting can enable
management to identify anomalies in its operations prior to year-end, allowing them to better
prepare the business.

5. MONITORING

Last but not least, there is monitoring. This process is ongoing and an important component of
management's responsibilities. Management is responsible for ensuring that controls function properly
and efficiently. If controls are not functioning properly, management is responsible for modifying them
and informing top administration and governing boards. Monitoring is frequently carried out by the
quality assurance or internal audit departments of a company.