Question

What are the five components of internal control? Briefly explain each component.

Short answer

The five components of the internal control are:

1. Control Procedure
2. Risk Assessment
3. Information System
4. Monitoring of controls
5. Environment

Step-by-step solution

Meaning of Internal Control

Internal control refers to an organization's rules or procedures to prevent fraud, safeguard assets, and promote operational efficiency.

Five components of internal control

1. Control Procedures:

Control procedures are framed to achieve the goals of the business entity.

2. Risk Assessment:

Every business organization must assess the risks in their business because they may affect the business position. If the business risks are higher, then the entity needs to control more to safeguard its assets and prevent fraud.

3. Information System:

As in a business, some people have the authority to use the accounting information system, so there should be more control to protect the business's assets to approve and cross-check all the transactions.

4. Monitoring of Controls:

There are two persons, internal and external auditors, to monitor the company's control. The internal auditor ensures that the company is following all the legal requirements or not. In contrast, an external auditor is an outside person to ensure that the company's financial statements are made according to GAAP.

5. Environment:

The environment of an organization is essential as it depends on the top-level management. If they work ethically and have good behavior with the employees, following all the rules, then it can also motivate the employess to follow all the rules and guidelines.