Article
Navigating the basics of internal controls
May 22, 2024 · Authored by Mumta Taneja, Katlyn Andrews
Whether you are diving into the world of internal controls for the first time or you’re a seasoned professional seeking a refresher, understanding the basics of internal controls is crucial in maintaining integrity and compliance within your organization.
Learn more by tuning into our on-demand webinar to hear directly from Baker Tilly’s risk advisory specialists as they explain the essential components of internal controls, define its role in risk management and compliance and discuss how to establish robust processes to safeguard an organization’s operations.
What is risk?
First understanding risk is critical to understanding internal controls. Risk can be defined in a few different ways:
- The possibility of an event occurring that will impact the achievement of an organization’s mission and objectives
- Possible events that could cause harm or loss
- The possibility of an undesirable action taking place
Simply stated, risk is what can go wrong (or, alternatively, what needs to go right)?
Risk is typically measured in terms of potential impact to an organization and the likelihood that an adverse event will occur. Once risks are identified and ranked, organizations can then identify and implement controls to address these risks, beginning with those that are both highly likely to occur and would have a significant impact on the organization.
What is internal control?
Internal control is a process designed to manage risk and provide reasonable assurance that the organization will achieve its operational, reporting and compliance objectives. Internal controls are defined broadly to allow flexibility in its application and can be broadly applied to organizations of different size, industry and geography.
Five components of internal control
The Committee of Sponsoring Organizations (COSO) is a voluntary private-sector organization dedicated to improving the quality of financial reporting through business ethics, effective internal controls and corporate governance. In 2013, it issued the current version of its Internal Control – Integrated Framework, the most widely used internal control framework for U.S.-based companies.
