Tyco, WorldCom and Enron are examples of companies that have failed due to inadequate internal audits. Internal control systems are useful for organizations because they identify and correct accounting fraud or errors. However, internal controls are useless if the risks to the organization's routine decisions are not monitored. Corporate Risk Management (ERM) focuses on the risks associated with the organization's operation and ensures that eliminating, mitigating or compensating for such risks (Louwers, Ramsay, Sinason and Strawser) eliminates control. In addition, the ERM identifies and evaluates the risk of management objectives by evaluating internal control elements; control environment, risk analysis, control procedures, supervision, and information and communication
An effective control environment primarily defines organizational structure, commitment to competence, assignment of powers and responsibilities, and internal audit functions. Control environments are important for any kind of risk approach, as organizational sound, organizational internal control bases, and risk response (Louwers et al) are applied.
Risk Assessment is the process that is the probability and impact of the risks for management purposes. Risk assessment usually involves risk taking. After recognizing potential risks, it becomes the risk portfolio of the organization. The risk response is then used to evaluate relationships and total effects and make changes to optimize the risk portfolio (McCarthy, Flynn and Brownstein).
Control procedures are management measures that eliminate, mitigate and compensate for risks (Louwers et al.). The most commonly used control procedures are performance appraisal, task separation, physical checks and information processing controls. Performance appraisals allow management to periodically evaluate the organization's objectives and ensure that they are met. Separating tasks separates tasks such as carrying out transactions, conducting records, and reconciling existing assets with current amounts to reduce the individual's risk of creating and concealing mistakes, fraud and false statements within the organization (Louwers et al.) . Organizations have physical controls in place to prevent unauthorized persons from accessing documents, inventory, and certain areas. Information processing audits create tracking pathways and ensure correct processing of financial statements transactions in their place.
Supervision continually evaluates the quality of the organization's internal controls. Examples of control audits may include analyzing customer or supplier billing complaints, overseeing transaction processing accuracy, and comparing inventory amounts to assets and liabilities (Louwers and others). Observation activities are similar to control activities. Unlike control activities, supervisory activities are deeper, as they include identifying deficiencies in other controls. Although oversight involves management tasks, audit committees generally carry out these tasks.
Information and Communication
Information and communication are required for management to meet the organization's objectives. Information systems are effective when consistently providing timely, accurate, accurate and accessible information about the organization's external resources. The means of communication are the transfer of information to internal and external sources through the production and dissemination of the report (Louwers et al.)
Insurance and portfolio approaches are good tools as they allow organizations to tolerate risk save on investment that is immaterial and relevant to their investment goals. However, these approaches do not provide periodic and timely assessments that lead to these approaches or ensure that the organization's objectives are consistently met. In order to ensure that each organization fulfills and properly addresses the goals, it introduces a system that complements the effective internal control system and the insurance and portfolio approach.
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