Importance of an Internal Control System

Internal control system is a process, developed and implemented by an organization’s board of directors, management, and other employees, intended to provide assurance vis-à-vis achievement of organizational objectives (Peter, 2008). Objectives, which an organization achieves through an internal control system, are reliability of financial reporting, efficiency and effectiveness of operations, and conformity to relevant laws and regulations (Peter, 2008). According to the Committee of Sponsoring of the Treadway Commission (COSO: USA), an internal control system consists of five essential components. These components are monitoring; control activities; the control environment; information and communication; and risk assessment.

Concerning the risk assessment component, the role of an internal control system is to identify and analyze possible risks that an organization may face. An internal control system ensures that an organization’s assets as well as other resources are safeguarded against loss or possible misuse from organizational members or third parties. In addition, an internal control system identifies and analyzes any uncertainties that an organization may experience when meeting its financial, operational, and compliance objectives. Therefore, an internal control system is a vital segment of risk management scaffold (Peter, 2008). It ensures that organizational risks are kept as low as possible, hence reducing insurance cost incurred by an organization due to loss or misuse of its resources.

According to Peter (2008), an internal control system plays a vital role in ensuring that all organizational resources are directed towards achievement of the organization’s objectives. One of the most significant objectives in every organization is to maximize profit. This can only be achieved when an organization’s portfolio are properly managed, and when all resources, including the employees, work mutually towards achievement of maximum returns. An internal control system ensures that an organization’s portfolio earn as much returns as possible through incorporating actions, policies, preparations, and endeavors of all the resources working mutually in an organization in order to achieve the ultimate objective of profit maximization.

Currently, many business entities are taking numerous insurance covers as well as diversifying their investments in different areas; all in efforts to reduce risks and achieve maximum returns from their operations. As much as these approaches may be effective in overall achievement of an organization’s objectives, an internal control system is more beneficial because it assists an organization to achieve all its objectives all at once (Peter, 2008). Besides, an internal control system assists an organization to overcome the risk associated with the misuse of organization’s finances and other resources, thus providing a single approach to insurance and portfolio management, as opposed to the numerous approaches being taken by modern organizations concerning insurance and portfolio management.

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