internal control 1 By Prof Mahaley

Internal control is a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance: That information is reliable, accurate and timely. Of compliance with applicable laws, regulations, contracts, policies and procedures (ADHERENCE =FOLLOW rules.regulation,standards ,laws etc) INTERNAL CONTROL PROVIDE REASONABLE ASSURANCE , BUT NOT INFALLIABLE(INFALLIABLE =100% CORRECT OR never making mistakes or being wrong) As defined by the Committee of Sponsoring Organizations (COSO), an internal control is a process designed to provide reasonable assurance that an organization’s operations are effective and efficient, its financial disclosures are reliable, and it meets regulatory compliance objectives. Internal controls help companies to comply with laws and regulations, and prevent fraud. They also can help improve operational efficiency by ensuring that budgets are adhered to, policies are followed, capital shortages are identified, and accurate reports are generated for leadership. A company establishes internal controls as a measure against wrongdoing and as a tool to protect the company's interests. Internal controls ensure a company complies with federal and state laws and regulations in the management of financial data. Strong internal controls can improve operational efficiency and ensure accurate financial reporting during internal or external audits What are internal controls? Internal controls are procedures and processes put into place by a company to prevent fraud, promote accountability and ensure the integrity of financial data. Internal controls are unique to every company and designed according to the company's size and structure. Effective and efficient internal controls aim to meet company objectives and protect the company's interests. Internal controls not only address risks to the company but also reduce incurrences of unnecessary cost or efforts. The core purposes of internal controls are to:  Explain the process in which internal controls are carried out  Identify risks  Mitigate risks  Control the sharing of information  Evaluate effectiveness of internal controls Internal controls provide cohesion(the ability to stay or fit together well) and consistency to establish order and protocol within a business. Business owner establish protocols and set boundaries around how the procedure is followed and regularly review controls for efficacy and accuracy. An established internal control process outlines how the company handles financial transactions as well as the assignment of administrative and management tasks. When protocol and procedure are clear, employees understand what is expected of them and how to complete day-to-day tasks Types of Internal Controls In general, internal controls fall into one of three categories: Preventive Controls As the name implies, preventive controls prevent issues including accounting errors, material misstatements, fraud, or cyberattacks before they have a chance to happen. Such controls are essential because they help to lower the costs of errors or malicious actions. Preventative controls are designed to be implemented prior to a threat event and reduce and/or avoid the likelihood and potential impact of a successful threat event. Examples of preventative controls include policies, standards, processes, procedures, encryption, firewalls, and physical barriers. Some common preventive controls are:  Segregation of duties, especially in accounting and financial reporting  System access controls  Employee training  Authorization and approvals of invoices and expenditures  Physical security controls Detective Controls Detective controls find errors and irregularities that have already occurred. They are essential because they show whether preventive controls are operating as intended and because they help improve process quality and prevent the recurrence of errors. Examples of detective controls include:  Monthly reconciliations of transactions(bank reco or debtors reconciliation)  Organizational performance reviews, particularly budget-to-actual comparison(variance analysis)  Physical inventories of cash, goods, or raw materials(stock cheking)  External and internal audits Corrective Controls Corrective controls resolve existing issues that may lead to or exacerbate (make more severe; worsen,complicated,mess,confusion ) fraud, financial losses, or reputational damage. They include:  Software patch management  Updated policies for information systems  Disciplinary action  Ledger verification