Internal Controls

Internal controls are designed to provide reasonable assurance that the financial statements are accurate and reliable.

Information and communication is not a component of internal control. The four components of internal control are control environment, risk assessment, control activities, and monitoring.

Segregation of duties, authorization of transactions, and reconciliation of bank statements are all examples of control activities.

Monitoring internal controls is important to ensure that the controls are operating effectively, to identify and correct any weaknesses in the controls, and to comply with regulatory requirements.

Management's philosophy and operating style, the integrity and ethical values of the organization, and the competence of the organization's personnel are all examples of control environment factors.

Risk assessment in internal control involves identifying and assessing the risks that may affect the achievement of the organization's objectives, designing and implementing controls to mitigate the identified risks, and monitoring the effectiveness of the controls.

Segregation of duties between cash handling and record keeping is an example of a control activity related to cash receipts.

Internal audit in internal control provides independent assurance that the internal control system is operating effectively, identifies and reports on any weaknesses in the internal control system, and makes recommendations for improvements to the internal control system.

Physical inventory counts, cycle counting, and periodic review of inventory records are all examples of control activities related to inventory.

The Sarbanes-Oxley Act of 2002 was enacted to improve the accuracy and reliability of financial reporting, to prevent fraud and error in financial reporting, and to enhance corporate governance.

Matching invoices to purchase orders and receiving reports, investigating and approving all vendor invoices, and periodic review of accounts payable balances are all examples of control activities related to accounts payable.

The COSO Internal Control Framework provides a framework for organizations to use in designing and implementing internal controls, helps organizations assess the effectiveness of their internal controls, and promotes ethical behavior in organizations.

Physical inspection of fixed assets, reconciliation of fixed asset records to the general ledger, and periodic review of fixed asset additions and disposals are all examples of control activities related to fixed assets.

The FCPA prohibits U.S. companies from bribing foreign government officials, promotes ethical behavior in international business transactions, and enhances corporate governance in U.S. companies.

Review of time cards and payroll records, authorization of all payroll disbursements, and reconciliation of payroll expenses to the general ledger are all examples of control activities related to payroll.