Internal Controls Assessments: Understanding Its Importance for Organizational Success

Just as a home inspection evaluates a property’s condition and identifies potential issues, an internal controls assessment thoroughly measures the effectiveness of internal controls, detects areas for improvements, and streamlines opportunities. Performing these assessments are an important step in an organization’s due diligence and shouldn’t be skipped.

Purpose & Objectives

With tools in hand, a home inspector meticulously examines the structural integrity of a property and assesses its critical systems to ensure they function properly and safely. The purpose of an internal controls assessment is the same, as it evaluates the effectiveness of internal controls within an organization. By conducting a process walkthrough, the assessment can identify weaknesses in the system and determine whether the process is functioning as intended.

An internal controls assessment highlights areas for improved efficiency by spotting redundancies in processes and cost savings opportunities. It may uncover inefficiencies, such as outdated manual processes and redundant tasks that could be streamlined through automation, leading to faster operations.

This assessment will be performed by a designated internal controls team that is well-versed in internal control frameworks, compliance requirements, applicable regulations and industry best practices. Their assessment then provides actionable insights to enhance operational efficiency, mitigate risks, and ensure adherence to legal and regulatory standards.

Scope

Depending on scope, an internal controls assessment works to consider financial reporting, IT, compliance, and operational controls, while walking through a specific process. Think of it as covering all internal and external elements of a house, like the roof and plumbing, during a home inspection.

An internal controls assessment provides organizations with the resources to safeguard assets, ensure accurate financial reporting and promote operational efficiency. It involves reviewing policies and procedures and assessing the adequacy of controls against established standards and regulations. This assessment typically covers financial reporting, compliance, and operational processes to prevent fraud or noncompliance. The results help management address vulnerabilities and enhance overall risk management.

Outcomes & Deliverables

After a home inspection is complete, buyers are provided with a detailed report on the current state of the home, highlighting any issues or required repairs. An internal controls assessment report is much like that, as it identifies weaknesses and offers recommendations for improvements to enhance effectiveness. This report ensures that controls are functioning as intended and helps strengthen the control environment. Ultimately, the outcome allows the organization to know where further improvement is needed.

Since the assessment evaluates the financial reporting controls in place, it instills greater confidence in the accuracy and reliability of the reported financial items, including assets and liabilities. A robust internal control environment, as described in a final report, boosts investor and stakeholder confidence by demonstrating the company’s commitment to strong governance and risk management, ultimately contributing to a higher valuation.

The Benefits of an Internal Controls Assessment

An internal controls assessment protects against fraud by evaluating and ensuring that an organization’s safeguards are effectively designed to detect and prevent fraudulent activities. This assessment also supports better communication with stakeholders by providing a clear understanding of the organization’s control framework and areas needing attention.

If your organization requires assistance with conducting an internal controls assessment, the team at Sikich specializes in providing tailored support to meet your needs. Just as you would want your home inspector to be highly qualified, you should also ensure that your internal controls assessment team has the same level of expertise. Reach out to us to initiate a discussion, and we can offer our expertise and help guide you through the process.

About Our Authors

Jesse Laseman, CIA, CFE, is an internal audit consultant on the Governance, Risk and Compliance team. He has experience executing audit engagements in industries such as financial services, government, not-for-profit and professional services. His expertise includes operational audits, data analysis and interpretation, internal control testing, and the development and implementation of internal control recommendations.

Melanie Mui, CIA, CFE, is an internal audit director of Sikich’s Governance, Risk and Compliance services. She has more than 20 years of experience serving a variety of industries, including manufacturing, energy, government, and not-for-profit. Melanie continues to demonstrate the ability to lead, motivate and manage teams across multiple locations for the delivery of high-quality services.