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COMPONENTS OF INTERNAL CONTROL |
Control components are intended to extend beyond the detailed control procedures and combine into a cohesive whole to enable the board to maintain control. The components also provide the framework for structuring a control evaluation. The following broad interrelated components of control are identified:
Control Environment
The control environment has a pervasive influence over the way business activities and processes are conducted. It begins with the board, and sets the tone within the organisation, influencing the ethical and organisational behaviour and attitude of all personnel. The control environment forms the foundation for all other components of internal control providing the business with discipline and structure.
Risk Assessment
Risk assessment is the identification and analysis of risks relevant to the achievement of business objectives, forming a basis for determining how the risks should be managed. A risk assessment follows identification of business objectives and provides a rational way to set control priorities and design cost-effective controls. Risk assessment lies at the heart of an assessment of the adequacy of business controls.
Control Activities
Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achieve the entity's business objectives. Control activities are part of the business process and enable management to control the day-to-day activities of the entity. Control activities would typically include approvals, authorisations, verifications, reconciliations, reviews and segregation of duties. Control activities may be detective or preventative. Preventative controls are designed to ensure that business processes operate effectively first time. Detective controls are control activities designed to identify any process failures so that corrective action can be taken timeously.
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