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Internal control systems

COSO model of internal control

In 1992 COSO (Committee of Sponsoring Organisations) stated that effective internal
control systems consist of five integrated elements.

3.1 Control environment

 The control environment can be thought of as management's attitude, actions
and awareness of the need for internal controls – the ‘tone at the top’.

3.2 Risk assessment

 Need to identify and assess risks in respect of established objectives.

 Assessment should consider internal and external factors and distinguish
between controllable and uncontrollable risks.

3.3 Control activities (= internal controls)

 Once controllable risks have been identified, actual specific control activities
can be undertaken to reduce those risks.

3.4 Information and communication

 In order for managers to operate the internal controls, they need quality
information.

3.5 Monitoring

 If the system is not monitored it will be very difficult to assess whether it is out
of control and needs amendment.

 This element of an internal control system is associated with internal audit, as
well as general supervision.

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