Internal control can be described as any action taken by an organization to help enhance the likelihood that the objectives of the organization will be achieved. The definition of internal control has evolved over recent years as different internal control models have been developed. This article will describe these models, present the definitions of internal control they provide, and indicate the components of internal control. Various parties responsible for and affected by internal control will also be discussed. THE COSO MODEL
In the United States many organizations have adopted the internal control concepts presented in the report of the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Published in 1992, the COSO report defines internal control as: a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: * effectiveness and efficiency of operations,
* reliability of financial reporting, and
* compliance with applicable laws and regulations.
COSO describes internal control as consisting of five essential components. These components, which are subdivided into seventeen factors, include: 1. The control environment
2. Risk assessment
3. Control activities
4. Information and communication
The COSO model is depicted as a pyramid, with control environment forming a base for control activities, risk assessment, and monitoring. Information and communication link the different levels of the pyramid. As the base of the pyramid, the control environment is arguably the most important component because it sets the tone for the organization. Factors of the control environment include employees' integrity, the organization's commitment to competence, management's philosophy and operating style, and the attention and direction of the board of directors and its audit committee. The control environment provides discipline and structure for the other components. Risk assessment refers to the identification, analysis, and management of uncertainty facing the organization. Risk assessment focuses on the uncertainties in meeting the organization's financial, compliance, and operational objectives. Changes in personnel, new product lines, or rapid expansion could affect an organization's risks. Control activities include the policies and procedures maintained by an organization to address risk-prone areas. An example of a control activity is a policy requiring approval by the board of directors for all purchases exceeding a predetermined amount. Control activities were once thought to be the most important element of internal control, but COSO suggests that the control environment is more critical since the control environment fosters the best actions, while control activities provide safeguards to prevent wrong actions from occurring. Information and communication encompasses the identification, capture, and exchange of financial, operational, and compliance information in a timely manner. People within an organization who have timely, reliable information are better able to conduct, manage, and control the organization's operations. Monitoring refers to the assessment of the quality of internal control. Monitoring activities provide information about potential and actual breakdowns in a control system that could make it difficult for an organization to accomplish its goals. Informal monitoring activities might include management's checking with subordinates to see if objectives are being met. A more formal monitoring activity would be an assessment of the internal control system by the organization's internal auditors. OTHER CONTROL MODELS
Some users of the COSO report have found it difficult to read and understand. A model that some believe overcomes this difficulty is found in a report from the Canadian Institute of Chartered...
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