Which of the internal control components provides the foundation for all the other components of internal control?
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University of California, Santa Barbara
In an effective control environment, competent people understand their responsibilities and the limits of their authority, and are knowledgeable, mindful, and committed to doing what is right. The university has adopted an internal control methodology developed by the Committee of Sponsoring Organizations (COSO), in which internal control is defined as a process implemented by management that provides reasonable assurance that: The above internal controls definition was developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) which is recognized by the Office of the University Auditor.
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Penn has adopted the Integrated Internal Control Framework (IICF), an adaptation of COSO (Committee of Sponsoring Organizations of the Treadway Commission), for utilization as the foundation of the internal control and compliance environment. This Framework defines internal control is a process, effected by an entity’s board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
This definition reflects certain fundamental concepts:
Effective administration involves planning, executing and monitoring. Internal control is a tool used by administrators to accomplish these processes. Management’s Responsibility For Internal ControlIn accordance with University Policy 2701, management is responsible, in both the central and decentralized operating units, for establishing, maintaining and promoting effective business practices and effective internal controls. Such systems of internal control will vary from activity to activity depending upon the operating environment, including the size of the entity, its diversity of operations and the degree of centralization of financial and administrative management. While there may be practical limitations to the implementation of some internal controls, each business function throughout the University and Penn Medicine must establish and maintain a system of controls which meets the minimum requirements as established by the University’s Internal Control Policy. A properly functioning system of controls improves the efficiency and effectiveness of operations, contributes to safeguarding assets and identifies and discourages irregularities, such as questionable or illegal payments and practices, conflict of interest activities and other diversions of assets. Components of Internal ControlInternal Control consists of five interrelated components derived from basic University operations and administrative processes as follows:
The following models show the relationships among these components: COSO Pyramid shows the correlation between internal control components.COSO Cube shows the relationship between units, activity and objectives. The Control Environment provides an atmosphere in which people conduct their activities and carry out their control responsibilities. It serves as the foundation for the other components. Within this environment, management assesses risks to the achievement of specified objectives. Control activities help ensure that management directives are carried out to address the risks. Meanwhile, relevant information is captured and communicated throughout the organization. The entire process is monitored and modified as conditions warrant. Types of ControlsMany types of controls can help management direct their activities, such as:
Often, the best strategy is a combination and collection of all types of controls used together that enable an organization to achieve its goals and objectives.
Internal controls are one of the most essential elements within any organization. Internal controls are put in place to enable organizations to achieve their goals and missions. Management is responsible for the design, implementation, and maintenance of all internal controls, while the Board is responsible for the oversight of the control environment. Strong internal controls allow for three main objectives: accurate and reliable financial reporting, compliance with laws and regulations, and effectiveness and efficiency of the organizations operations. So, how do we achieve this? It all starts with your internal control framework. Each organization’s internal control framework should consist of 5 components:
Control EnvironmentThis component is the foundation for all other components of internal control. It sets the tone at and from the top of an organization and provides discipline and structure. There are several factors that make up control environment, those include:
Risk AssessmentThis component is used to identify and analyze risks that may prevent an organization from achieving its objectives. Risk factors could consist of internal and external factors. Properly identifying risks will allow management to determine how to mitigate and manage these risks. Management should evaluate risk on a regular basis, as changes in an organization, such as staffing, new policies, new software applications, new regulations, etc., could all impact an organization’s risk assessment. Control ActivitiesThese are the policies and procedures that help ensure that management directives are carried out. One of the most important control activities is segregation of duties. There should be different individuals responsible for authorizing transactions, recording transactions, having custody of assets, and performing comparisons/reconciliations. For example, the individual responsible for hiring employees should not be the individual paying employees because it increases the chances that a ghost employee will go unnoticed. If this isn’t possible, management needs to assess where other controls can be implemented to compensate for the overlapping responsibilities. This will help organizations to better identify any errors or irregularities in a timely manner. Information and CommunicationThis component relates to the identification and transfer of pertinent information in a timely manner to allow personnel to carry out their responsibilities. For instance, timely financial reporting can allow management to identify anomalies in its operations prior to year-end so that they can better prepare the business. MonitoringAnd, last but not least, monitoring. This process is ongoing and is a key element of management’s responsibilities. Management is responsible for ensuring controls are operating as intended and whether they are efficient. If controls are not operating effectively, management is then responsible to modify these controls and inform top administration and governing boards. Monitoring is often done through a company’s quality assurance or internal audit departments. The proper implementation of these five components can help a business achieve its goals while avoiding complications along the way.
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