For organizations of all sizes, risk assessment and internal controls are essential for maintaining the integrity of data used in financial reporting and promoting operational efficiency.
Conducting regular reviews of internal controls and assessing current and potential risks can help an organization improve operations, detect fraud, develop efficiencies, safeguard assets and information, and strengthen governance and compliance.
When risk assessment and internal controls work together, organizations can better understand where risk exists, how those risks may affect operations, and what policies or procedures should be used to address them. This creates a stronger foundation for reliable reporting, effective oversight, and informed decision-making.
Why Risk Assessment and Internal Controls Matter
Risk assessment and internal controls help organizations review internal operations, identify weaknesses, and respond to risks before they create larger problems. They also support financial reporting, operational efficiency, compliance, and accountability.
Risk assessments are a primary tool that enable organizations to review internal operations and policies to identify the risks they face. Timely and regular reviews of these policies allow organizations to act on those risks at any point in time.
These assessments also enable organizations to implement safeguards through internal controls. Internal controls are the policies and procedures that ensure an organization’s financial information is reliable, its operations are efficient, and it remains in compliance with laws and regulations.
These controls should be reviewed for efficiency, weaknesses, and opportunities for improvement. Organizations that need support strengthening internal processes, reporting, and advisory needs may also benefit from client accounting and advisory services.
How Risk Assessment and Internal Controls Work Together
Risk assessment and internal controls are closely connected. A risk assessment helps an organization identify, analyze, and understand risks, while internal controls help address those risks through specific policies and procedures.
Without a risk assessment, an organization may not know which controls are most important. Without internal controls, the organization may identify risks but lack the structure needed to manage them.
Together, risk assessment and internal controls help organizations create a practical system for protecting assets, improving reporting, and supporting compliance. They also help leadership make better decisions by providing a clearer view of operational and financial risk.
Examples of Internal Controls
Examples of internal controls include segregation of duties, security measures, approval hierarchies, access limitations, secondary reviews, and account reconciliations. These controls can help detect errors or fraud in a timely manner, ensure proper approvals, limit unauthorized access, and promote transparency.
Each control supports a specific part of the organization’s broader risk management process. For example, approval hierarchies help ensure decisions receive the right level of review, while access limitations help protect sensitive data and reduce the chance of unauthorized activity.
Account reconciliations and secondary reviews can also help identify issues before they become larger problems. When these controls are used consistently, organizations are better positioned to protect assets, improve reporting, and support accountability.
Establishing a Framework for Risk Assessment and Internal Controls
As a best practice, organizations should establish and maintain a framework that ensures day-to-day operations align with organizational goals. A common framework used is the COSO Framework, which serves as a foundation for integrity, ethical values, and a disciplined operational structure.
A framework gives organizations a structured way to evaluate risks, review controls, and monitor whether policies and procedures are working as intended. It can also help leadership and employees understand how their roles connect to the organization’s control environment.
Deloitte provides additional perspective on how organizations can evaluate and strengthen effective internal controls, including the importance of governance, reporting, and control design.
Control Environment
Control Environment: The foundation of the organization’s culture, including integrity, ethical values, and accountability.
The control environment shapes how employees, management, and those charged with governance approach policies, procedures, and expectations. When integrity and accountability are emphasized, the organization can build a stronger foundation for internal control performance.
Risk Assessment
Risk Assessment: The process of identifying, analyzing, and managing current and anticipated risks that could threaten the achievement of objectives.
This process helps organizations understand which risks are most likely to affect operations, reporting, compliance, and oversight. Regular assessment also allows organizations to respond as risks change over time.
Control Activities
Control Activities: Policies and procedures that ensure management’s directives are carried out to mitigate risks.
These activities may include approvals, reviews, reconciliations, segregation of duties, and access restrictions. When designed properly, control activities help reduce risk and support consistent operations.
Information and Communication
Information and Communication: Systems that identify, capture, and exchange information in a timely manner to support internal controls.
Strong communication helps ensure that employees understand their responsibilities and that leadership receives the information needed to make informed decisions. Timely information also supports effective monitoring and oversight.
Monitoring Activities
Ongoing or separate evaluations used to assess the quality and effectiveness of internal control performance over time.
Monitoring helps organizations determine whether controls are operating as intended. It also helps identify weaknesses, gaps, or opportunities for improvement as operations and risks change.
Building a Strong Control Environment
Risk assessment and internal controls are most effective when they are supported by a strong control environment. To build an effective control environment, an organization should plan the objectives and scope of the internal control system.
This first step helps define what the organization wants its control structure to accomplish and which processes should be reviewed. The organization should also evaluate and assess current processes and available documentation.
This review helps determine whether policies are clear, whether procedures are being followed, and whether documentation supports the organization’s reporting and compliance needs. After that review, the organization should develop remediation plans and recommendations for any control gaps identified.
The organization should also test the effectiveness of controls in addressing current and emerging risks.
- Plan the objectives and scope of the internal control system.
- Evaluate and assess current processes and available documentation.
- Develop remediation plans and recommendations for any control gaps identified.
- Test the effectiveness of controls in addressing current and emerging risks.
McKinsey discusses the importance of reviewing operational risk, compliance, and controls, which aligns with the need to evaluate risk, strengthen processes, and support effective oversight.
Making Risk Assessment and Internal Controls Ongoing
Building this framework is not a one-time process; it should be ongoing and involve all levels of the organization, including employees, management, and those charged with governance.
Promoting and investing in an ethical tone at the top can shape the organization’s integrity and culture, while also ensuring employees understand their role in the control environment. This helps connect daily responsibilities with broader organizational goals.
When risk assessment and internal controls are treated as an ongoing process, organizations can respond more effectively to new risks, changing operations, and updated compliance expectations. Ongoing review also helps ensure that policies and procedures remain useful as the organization evolves.
Harvard Business Review also discusses how employees can play an important role in identifying and managing risk in its article on employees as risk managers. This perspective supports the importance of involving employees, management, and governance leaders in the control environment.
Working With Outside Advisors
While some organizations may lack the resources or experience to implement risk assessment and internal controls independently, it is encouraged to work both internally and with outside advisors and accountants.
External advisors can help tailor strategies, provide control and process recommendations, and offer insight into current industry trends based on the organization’s needs. Their outside perspective can help organizations identify control gaps, strengthen documentation, and improve risk assessment policies and procedures.
Establishing and maintaining these systems creates a structure that is both efficient and effective, supporting internal reporting, external audits, and overall oversight.
Organizations that want to strengthen reporting, controls, and audit readiness may also benefit from audit and assurance services. These services can support the review of processes, documentation, and internal control performance.
For organizations seeking experienced support, the Bowers team has experience across various industries and has assisted numerous organizations in strengthening their control environments, including their risk assessment policies and procedures.
FAQ
These questions summarize the main points about risk assessment and internal controls, including why they matter, how they work together, and how organizations can maintain an effective control environment.
What are risk assessment and internal controls?
Risk assessment and internal controls are processes that help organizations identify risks and create policies and procedures to manage those risks. They support reliable financial reporting, efficient operations, compliance, and oversight.
Why are risk assessment and internal controls important?
Risk assessment and internal controls are essential for maintaining the integrity of data used in financial reporting and promoting operational efficiency. They also help organizations detect fraud, safeguard assets and information, and strengthen governance and compliance.
How do risk assessment and internal controls work together?
A risk assessment helps an organization identify and understand risks. Internal controls help address those risks through policies, procedures, approvals, reviews, access limitations, and monitoring.
What are examples of internal controls?
Examples of internal controls include segregation of duties, security measures, approval hierarchies, access limitations, secondary reviews, and account reconciliations.
How often should risk assessment and internal controls be reviewed?
Risk assessment and internal controls should be reviewed regularly. Timely and regular reviews help organizations identify weaknesses, respond to current and potential risks, and improve policies and procedures.
Can outside advisors help with risk assessment and internal controls?
Yes. External advisors can help tailor strategies, provide control and process recommendations, and offer insight into current industry trends based on the organization’s needs.