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Designing and Implementation of Controls

To those of us in the audit profession it seems intuitively obvious what internal controls are and the reason for having them. Unfortunately in many organizations internal auditors spend a great deal of time and effort explaining to others (including management) what constitutes internal controls, who is responsible for establishing controls and who evaluates those controls to determine if they are adequate and working as designed. This page should answer those questions and provide guidance on what can be done to communicate to management, boards and senior executives the concept of internal control.

What are Internal Controls?

In plain English, internal controls are like good old common sense practices. In your personal life, you exercise good internal control principles when you:

  • make travel plans 
  • store and lockup valuable personal belongings 
  • keep copies of your tax returns 
  • match credit card receipts to monthly statements 
  • save for a rainy day or retirement 
  • balance your checkbook 

More formally, internal control is broadly defined as a process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

  • Effectiveness and efficiency of operations 
  • Reliability of financial reporting 
  • Compliance with applicable laws and regulations 

Internal controls are tools that help managers be effective and efficient while avoiding serious problems such as overspending, operational failures, and violations of law. Internal controls are the structure, policies, and procedures put in place to provide reasonable assurance that management meets its objectives and fulfills its responsibilities. Management meets its responsibilities for internal controls when:

  • Programs and functions achieve their intended results (effective) 
  • Resource use is consistent with the agency mission (efficient) 
  • Laws and regulations are followed (compliance) 
  • Accurate and timely information is prepared (reliable reporting) 

Effective internal control begins with written goals and objectives including:

  • Operational objectives 
  • Financial reporting objectives 
  • Compliance objectives 

The principles of effective internal control should ensure that:

  • Internal controls benefit rather than encumber management. 
  • Internal controls make sense within each organization’s unique operating environment. 
  • Internal controls are not stand-alone practices. They are woven into day-to-day responsibilities of managers. 
  • Internal structures and controls are cost effective.