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The COSO (Committee of Sponsoring Organizations) Framework defines five interrelated components of internal control. These components work together to ensure the reliability of financial reporting, operational efficiency, and compliance with laws and regulations.
1. Control Environment
1. Control Environment
The control environment sets the tone at the top, establishing the foundation for an effective internal control system. It includes:
Integrity and ethical values – Commitment to honesty and ethical behavior.
Board of Directors’ oversight – Independent oversight of management.
Organizational structure – Clear reporting lines and responsibilities.
Human resource policies – Recruiting, training, and retaining competent employees.
2. Risk Assessment
2. Risk Assessment
This component involves identifying and analyzing risks that could prevent the achievement of objectives. It includes:
Assessing financial reporting risks – Identifying risks of material misstatement.
Fraud risk assessment – Recognizing potential fraud risks.
Management’s response to risks – Implementing controls to mitigate risks.
3. Control Activities
3. Control Activities
These are policies and procedures designed to ensure management directives are carried out effectively. Examples include:
Authorization and approval – Proper approval of transactions.
Segregation of duties – Preventing fraud and errors by dividing responsibilities.
Reconciliations and verifications – Regular checks to ensure accuracy.
IT controls – Security measures for safeguarding financial data.
4. Information and Communication
4. Information and Communication
An effective internal control system relies on timely, relevant, and reliable information. This includes:
Internal communication – Clear reporting lines within the organization.
External communication – Transparent reporting to regulators, auditors, and stakeholders.
Documentation and records management – Proper maintenance of financial records.
5. Monitoring
5. Monitoring
This involves ongoing and separate evaluations to ensure controls are operating effectively. It includes:
Internal audits – Independent reviews of internal controls.
Management oversight – Regular supervision and performance reviews.
Corrective actions – Addressing deficiencies identified during audits.
Each of these five components must work in an integrated manner to support the overall effectiveness of internal control.
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