Question

Please list out 8 elements of internal controls. Provide them in three paragraphs.

Answer 1

Elements of Internal Control systems:

Internal control system:

An internal control system comprises the whole network of systems established in an organisation to provide reasonable assurance that organisational objectives will be achieved.

Elements:

1)

Control Environment:

This is sometimes referred to as the 'tone at the top' of the organisation. It describes the ethics and culture of the organisation,which provide a framework within which other aspects of internal control operate. The control environment is set by the tone of management, its philosophy and management style, the way in which authority is delegated, the way in which staff are organised and developed, and the commitment of the board of directors.

The control environment has been defined by the Institute of Internal Auditors as: 'The attitude and actions of the board and management regarding the significance of control within the organisation. The control environment provides the discipline and structure for the achievement of the primary objectives of the system of internal control.

2)

Risk assessment:

There is a connection between the objectives of an organisation and the risks to which it is exposed. In order to make an assessment of risks, objectives for the organisation must be established. Having established the objectives, the risks involved in achieving those objectives should be identified and assessed, and this assessment should form the basis for deciding how the risks should be managed.

3)

Information and communication:

An organisation must gather information and communicate it to the right people so that they can carry out their responsibilities. Managers need both internal and external information to make informed business decisions and to report externally. The quality of information systems is a key factor in this aspect of internal control.

4)

Control activities

These are policies and procedures that ensure that the decisions and instructions of management are carried out. Control activities occur at all levels within an organisation, and include authorisations, verifications, reconciliations, approvals, segregation of duties, performance reviews and asset security measures. These control activities are commonly referred to as internal controls.

5)

Monitoring:

The internal control system must be monitored. This element of an internal control system is associated with internal audit, as well as general supervision. It is important that deficiencies in the internal control system should be identified and reported up to senior management and the board of directors.

6)

Separation of Duties:

Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting and auditing. The further duties are separated, the less chance any single employee has of committing fraudulent acts. For small businesses with only a few accounting employees, sharing responsibilities between two or more people or requiring critical tasks to be reviewed by co-workers can serve the same purpose.

7)

Accounting System Access Controls:

Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access in the first place.

8)

Daily or Weekly Trial Balances:

Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Even so, it is still possible for errors to bring a double-entry system out of balance at any given time. Calculating daily or weekly trial balances can provide regular insight into the state of the system, allowing you to discover and investigate discrepancies as early as possible.