Internal controls play an essential role in the operations of an entity and in preventing and detecting fraud. These controls should be properly documented and regularly evaluated to ensure that they are operating effectively. As part of our advisory services offered at L&B, we can perform a review of existing internal control procedures for your business and assist in the implementation of procedural improvements!
The purpose of internal controls is to provide reasonable assurance about the reliability of an entity’s financial reporting, effectiveness of operations, compliance with laws and regulations and prevention or detection of fraud. Management is responsible for ensuring that the entity has established processes to identify and evaluate business risks which could influence financial reporting practices and implement processes to mitigate these risks. Important aspects to consider when performing an evaluation of controls includes:
- Control Environment – This area of internal control relates to the overall culture of an entity and provides a basis for carrying out internal control across an organization. Set by senior management and the board of directors, the control environment emphasizes the importance of ethical values and expected standards of conduct.
- Risk Assessment – The evaluation of all activities and associated risks in an organization is referred to as risk assessment. There are internal and external risks associated with any type of business. Your company should assess its business risks and fraud risks, create objectives surrounding how the risks can be mitigated to an appropriate level, and implement appropriate processes and procedures.
- Control Activities – This area of internal control relates to procedures put in place to mitigate risks, particularly those considered too risky during the risk assessment process, to ensure that management’s control objectives are achieved. Examples of control activities include segregation of duties, required authorizations, and operational performance reviews.
- Information and Communication – How management of an entity communicates the culture of compliance and standards of conduct, as well as sharing the policies that need to be followed, is referred to as information and communication. This area of internal control stresses the importance of a broad understanding of internal control processes among employees at every level. This is essential for implemented controls to be effective in an organization.
- Monitoring – This area of internal control refers to the activities used to monitor processes within an organization. It is necessary to review the performance of internal control processes regularly to determine if the controls in place are successful and sufficiently mitigating organizational risk factors.
It is essential to properly document the internal control procedures in place at your organization. Documentation and communication of the areas described above will ensure that employees understand their roles, the importance of their participation, leading to sounder internal control environment.
We are happy to assist you in answering any questions regarding documentation or implementation of internal controls, or any of our Advisory Services. For more information, please contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Assurance & Advisory Team.