Internal control is an important part of a business organizations overall management and governance system. These controls are designed to provide reasonable assurances that the goals and objectives of the organization are achieved and that risks associated with activities are managed to acceptable levels. They are a part of the organization’s operations and culture, and thus have a significant impact on all areas of the company.
Internal control is divided into three categories: control environment, risk assessment, and control activities. First, control environment is the overall climate of control that affects the organisation and its control system. It includes the values and attitudes of teams, the management attitude towards internal control, and the clarity and enforceability of authority and responsibility. Secondly, risk assessment activities identify and assess the risks to the achievement of the organisation’s objectives and design, implement, monitor and adjust control activities accordingly. Thirdly, control activities are the measures employed to detect, prevent and mitigate risks to the achievement of the organisation’s objectives.
Internal control is an important component of corporate governance since it provides a cornerstone of risk management. It helps to ensure the timely identification and mitigation of risks to the organisation and maximizes efficiency and effectiveness through the use of processes that minimize waste and ensure purposeful action. It also serves to protect the organisation’s assets, customers and stakeholders. Through internal control, the organisation can ensure that it meets its financial and non-financial goals and achieve profitability in the long term.
Moreover, internal control is also an important element of effective internal governance as it helps in upholding accountability and supporting strategy and operations. It ensures that the organization’s resources are wisely administered and used efficiently and ethically. Furthermore, it creates an environment of trust between the management and the board of directors and other stakeholders of the organization.
Internal control further ensures compliance with applicable regulations, policies and procedures. It serves to provide assurance regarding both the internal process and the external relationship of the organization. It aims to improve reliability of financial reporting and detection of fraud. It also helps to mitigate risks associated with governance and legal issues, protecting the business from financial and reputational losses.
Finally, internal control is not a one-time process, as it requires continuous monitoring and adjustment as the organisation’s risk environment changes. For instance, control activities need to be monitored and tested to ensure the effectiveness of the controls. As organisations grow and change, new risks emergent and internal control systems need to be adjusted to ensure they remain effective. To ensure the effectiveness and efficiency of internal control, the organisation should adopt a culture of compliance and internal controls, with policies and procedures in place across the whole organisation.
