Components of internal control

The five components describe how the control system works as a whole. The following examples show how each component contributes to recording credit sales completely. standards.xrb.govt.nz

Component	Question it answers	Example
1. Control environment	What example does management set, and who is accountable?	Management gives the warehouse responsibility for dispatch and the accounts department responsibility for invoicing. Supervisors also have authority to investigate missing documents, even during busy periods.
2. Entity’s risk assessment process	How does management identify and assess what could go wrong?	Before opening a second warehouse, management identifies a risk that delivery notes from the new location may reach accounts late or go missing.
3. Control activities	What specific actions address the identified risks?	The company uses sequentially numbered delivery notes. Each week, a supervisor reviews a report of deliveries without invoices and assigns outstanding items for investigation.
4. Information system and communication	How is relevant information captured and passed to the people who need it?	When warehouse staff confirm delivery, the system sends the delivery note number, customer name and quantity to accounts so that staff can prepare the invoice.
5. Monitoring of controls	How does management know whether the controls continue to work?	Each month, the finance manager checks whether supervisors completed the weekly reviews and whether unresolved items are recurring at the same warehouse.

A useful distinction is control activity versus monitoring. The supervisor who investigates an unbilled delivery is performing the control. The finance manager who checks whether supervisors consistently carry out those reviews is monitoring the control.