Justification for an Internal Control System
Organizations that do not have the proper internal controls tend to deteriorate over time. Therefore, companies should incorporate effective internal control systems to accompany other risk management approaches like insurance and risk portfolio. Internal Control Systems can provide an additional reference tool for organizations to identify and assess operating controls, financial reporting, and regulatory compliance processes and to formulate preventive actions where needed.
The two types of approaches that are commonly used by companies are insurance and risk portfolio. Companies purchase insurance to transfer certain risk that may affect the property, employees, and other assets of the business. Insurance provides companies with a sense of relief from unexpected events such as fraud, natural disasters, injuries, and product replacement. Although insurance is a great way to mitigate risk, it lacks the proactive ability to protect organizations from losses.
Portfolio Risk Management is an approach that companies use to manage the risk of investments to determine the rate of return. Good portfolio system will help management to evaluate their risk-tolerance and optimize business operations (McCarthey, Flynn, & Brownstein, 2004). Corporations using portfolio risk management are able to take a more in depth look at risk to determine how they may fit into its risk appetite. The portfolio approach also provides organizations with a different view on how to reduce risk, develop new techniques to identify and analyze risk, and find correlations between risks of similar nature.
Currently both approaches provide internal controls that are essential to managing risk but have limitations in balancing and controlling risk factors. Finding an effective internal control system provides reasonable assurance for safeguarding assets. Thus, the internal control system was designed to satisfy basic objectives...
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