What are the 5 Components of Internal Controls

Published: Jan 13, 2022
By: Charles Saydek
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Internal controls are policies and procedures that are put in place to help ensure that the accounting and financial data is accurate and helps define the responsibilities and accountabilities for Company employees. This video is a brief overview on the five components of internal controls.

Transcript

Charles Saydek: Internal control. The thrilling topic of internal controls. Although the information might not be the most exhilarating topic, it is one that can prevent you from losing your hard earned money and assets. I’m Chuck Saydek, and Ralph Estel and I will be providing you with a few short videos about what internal controls are and how to put them in place to reduce the risk of fraud and, at the same time, increase the accuracy of your financial records. Having accurate financial records can help you better manage your business, achieve your goals and make appropriate staffing changes.

Now the boring part, (yes more boring that the last 40 seconds). To give you some technical knowledge, there are five components of internal controls. The first and most important is the control environment. The control environment is the tone set at the top. That means you and your management team. The smallest disregard of the procedures can trickle down to your employees and create control issues and opportunities for fraud.

The other four components are risk assessment, which is identifying where errors and fraud can take place, such as new vendor setup, software installation, cash collections, and the list goes on. Then there are control activities, which are policies and procedures put in place to prevent those risks, some examples are separation of duties, reconciliations, new vendor approval processes, and procedures for hiring new employees. The policies and procedures can get difficult to define the smaller the organization is, but that means there are fewer people that can perpetrate fraud or errors. The next component is communication and finally, monitoring. Timely communication, testing and reviewing your internal controls can help assess if those controls are achieving the Company’s objectives.

Now you know the fundamentals. The following videos will discuss the controls involved with cash receipts, cash disbursements, and fixed assets and inventory.

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