Question

Question: What are the five components of internal control? Briefly explain each component.

Answer 1

Step 1: Definition of internal controls

The organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records

Step 2: Five components of internal control

Control Procedures

Control procedures are designed to ensure that the business’s goals are achieved. The following section, “Internal Control Procedures,” discusses the strategies.

 

Risk Assessment

A company must identify its risks. For example, food manufacturers face the risk that their food products may harm people; aeroplane carrier businesses face the possibility that planes may crash; music companies face copyright infringement risks, and all companies face the risk of bankruptcy. Companies facing difficulties might be tempted to falsify their financial statements to make themselves look better than they are. 

 

Information System

As we have seen, the information system is critical. Controls must be in place within the information system to ensure that only authorised users access various parts of the accounting information system. 

 

Monitoring of Controls

Companies hire auditors to monitor their controls. An internal auditor is a team member of the business who ensures that the company’s employees are following company policies and that operations are running efficiently. 

 

Environment

The environment is the “tone at the top” or the culture of the business. It starts with the CFO or CEO and the top managers. They must behave honourably to set an excellent example for company employees. Each must demonstrate the importance of internal controls if they expect the employees to take the rules seriously.

The five components of the internal control is also known as CRIME.