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Internal Controls

What are internal controls?

In 1992, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a report called The Internal Control Integrated Framework, also known simply as the COSO Report, or as the COSO Framework. It has become a widely accepted definition of 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 relating to operations, reporting, and compliance.”

What is the COSO Framework for internal controls?

The COSO framework for internal controls was originally published in the 1992 COSO Report, but has since been updated. According to the 2013 version of the COSO report, internal controls are defined by 17 guiding principles broken down into five categories: 

  • Control environment
    • Commitment to integrity and ethics
    • Oversight responsibility
    • Establishing structure, authority and responsibility
    • Commitment to competence
    • Enforcement of accountability
  • Risk assessment
    • Specification of objectives
    • Risk identification and analysis
    • Fraud risk assessment
    • Identification and analysis of significant change
  • Control activities
    • Selection and development of risk mitigation activities
    • Selection and development of general technology controls
    • Deployment of controls-based policies and procedures
  • Information and communication
    • Use of relevant, important information
    • Internal communications
    • External communicaitons
  • Monitoring
    • Ongoing or separate evaluations of processes
    • Evaluation and communication of known deficiencies in program

What is an internal control framework? 

A control framework is an organization’s individual implementation of its own sense of internal control, most often guided by the general principles and procedures laid out by the COSO Framework.

How do internal controls pay a part in accounting? 

In accounting, internal controls often focus on seven operational principles identified as being conducive to best practices in accounting:

  • Separation of duties of bookkeeping, deposits, reporting, and auditing
  • Access controls to different parts of the accounting system to prevent any unauthorized access to it and its data
  • Physical audits of cash and assets
  • Documentation used for financial transactions, inventory receipts and expenses
  • Trial balances to test the accuracy and balancing of financial books
  • Reconciliations to ensure that accounting balances match up with balances held by external entities, such as banks and suppliers
  • Approval authority to prove that transactions have been adequately reviewed and approved at all levels
     
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