Internal controls are an integral part of the success of any company. Unfortunately, they are usually not given the due attention they need and are often overlooked by most business owners and stakeholders. Internal controls are mechanisms that safeguard your company's management and financial data. It is typically a structure that lays out a definitive process of detailing how your company receives and reports transactions, as well as the management and administrative tasks. So, how do you know if your company needs an internal control assessment, and how can you get one?

Understanding the Control Framework

The framework of a good internal control system includes:

• Control Environment- This sets the tone for your company, creating an awareness of the internal controls within your workforce.
• Risk Assessment- It identifies and analyzes possible risks to your company's objectives, giving you a solid basis to manage risks.
• Control Activities- These are procedures and policies that help your management directives are adhered to and carried out.
• Information and Communication- Processes and systems that help you identify, capture, and seamlessly exchange information in your business.
• Reporting and Monitoring- These processes help your employees examine and report the quality, performance, and deficiencies of internal controls to the management team.

Do You Need A Control Assessment?

In response to soaring fraud cases in the 1970s and 1980s, COSO (Committee of Sponsoring Organizations) in the U.S initiated a study to examine the way companies approach internal controls. COSO ruled that internal controls are a means to an end rather than an end in itself.

An internal control's primary goal should be to enhance financial reports' dependability and compliance with applicable laws. Consider the following objectives of an internal control assessment to help you determine if you need one.

1. Evaluating the Control Environment

A controlled environment is the building block of an internal control system. It sets the standard for your organization and significantly determines how your employees behave. It helps evaluate the understanding of your management team with regard to company values.

For instance, how can your company's management prioritize and uphold your company's values and ethics if they don't understand all regulations? Equally, if the employees involved in performing the controls, especially financial reporting, lack relevant skills training and education, they will not be effective in running and maintaining the control system. Therefore, having an internal control assessment helps you evaluate your control process, particularly your internal controls personnel, to guarantee your company uses best practices.

2. Investigating Control Activities

Your internal control system is only effective if it can translate into policies and procedures that are easily implementable. Information processing controls, performance reviews, physical controls, and separation of duties are the primary activities to look out for.

Performance reviews will help your management team to monitor an employee's effectiveness in their respective jobs. Segregation of duties reduces the chances of mistake and fraud and offers an excellent way to fast-track these in your company. An assessment of your internal controls can help you identify, for instance, an employee who is the custodian of your company's assets and is also a record-keeper to reduce the chances of theft.

3. Examining the Accounting Information System

Your company's accounting information system has a significant impact on the accuracy of performance reports and the efficacy of the policies you formulate. Assessing your internal controls gives you an excellent way to inspect data entry points and options for all transactions.

An assessment also helps you evaluate whether all the information is captured to create a useful journal or whether the data entry system/process is missing out on important aspects. You can also examine the accounting reports generated by your accounting personnel to check for errors, conformity, and clarity. You can then detect inconsistencies and make the necessary amends.

4. Evaluating the Quality of Monitoring

Internal control assessments allow you to verify how consistently you audit/evaluate your internal controls. Reviews of your internal controls help you actively supervise sensitive activities and follow up on customer complaints. With acceptable checks in place, your employees can make timely recommendations to management.

In summary, an internal control assessment will help your company achieve organization, compliance and will minimize your risk to fraud. If you have any questions or would like to learn more about Lutz's internal control assessment offering, please contact us today.