Components Of Internal Controls: The Important 5 Main Internal Control Components

There are five main components of internal controls. An effective internal control system requires all five components to be present and functioning together.

Such internal control components are:

1. Control environment;
2. Risk assessment;
3. Control activities;
4. Information and Communication; and
5. Monitoring 

Components Of Internal Controls

Let’s discuss the five internal control components in further detail.

Control Environment

The first internal control component relates to the control environment. The control environment sets the tone from the top. The board of directors provides oversight and guidance to the senior management to implement the strategies and plans defined by the board of directors. The management forms the set of processes, reporting lines, systems, and structures that provide the basis for carrying out internal controls across the organization. Control environment relates to the commitment of management and employees to integrity and ethical values.

For internal controls to be effective, an appropriate control environment should be enforced by and be developed under the involvement of the board of directors. The following six elements are best practice: 

• The board of directors should review policies and procedures periodically and ensure their compliance.
• The board of directors should determine whether there is an effective audit and control system in place to periodically test and monitor compliance with internal control policies and procedures with the capacity to timely report instances of noncompliance.
• The board of directors should ensure independence of internal and external auditors. This includes that internal auditors directly report to the board and that external auditors may present material findings to the board directly.
• The board of directors should also ensure that appropriate remedial action are being taken when instances of non-compliance are reported and that systems are improved to avoid recurring errors.
• The board should ensure that an effective management information systems is in place, which provides adequate information and records to the board.
• Finally, the board should effectively communicate the organization’s code of conduct, the applicable ethical and behavioral guidelines, and the expectation of compliance to all employees of the organization.

Risk Assessment

The second internal control component relates to assessing risks by means of a risk assessment. The risk assessment aims to determine how risks will be identified, assessed, and managed by the senior management, middle management, and lower management of the organization through the application of relevant internal controls. 

A risk is defined as “the possibility that an action or event will occur and adversely affect the achievement of the organization’s mission and objectives.” 

Risk assessment activities require all levels of management and employees to consider the impact of possible changes in the internal and external environment. Based on the results of the risk assessment, management adopts mitigating actions to manage the adverse impacts of identified risks. 

An effective process of risk assessment requires the board of directors and senior management to plan for and take appropriate measures to respond to the existing and potential risks. Such a risk assessment system requires two elements: 

1. The board of directors and senior management of the organization must have professionals with a  background in internal controls or audits. They are subject matter experts who perform risk and controls assessment and evaluation. These experts should be provided with adequate resources to perform their duties. 
2. Risks evolve and change with time. Therefore, the board of directors and senior management of the organization, with due involvement of subject matter experts, should appropriately and timely evaluate the risks and identify issues or gaps in internal controls related to existing processes and activities. 

Control Activities

The third internal control component relates to control activities themselves. An effective internal control system requires the management of the organization to develop control activities such as the development of policies, procedures, and standards that help management and employees mitigate identified risks. The purpose of control activities is to achieve the objectives and mission of the organization and manage the risks to which the organization is exposed. 

The control activities that are being designed and implemented may either be preventive or detective in nature. Preventive controls are designed and implemented by management to prevent the occurrence of risks. Detective controls, on the other hand, are the controls which aim to detect incidents that have already occurred. 

Information

The first internal control component relates to effective internal control information. Commonly, information is obtained by the organization’s management from both internal and external sources. Information is required to support all the components of internal controls. 

Management communicates with internal and external stakeholders and such communication is used to disseminate important information throughout the organization. The internal communication of information throughout an organization also allows senior management to demonstrate that control activities should be taken seriously by all the employees and staff working in different departments and functions. 

Monitoring

The fifth and final internal control component relates to the continuous monitoring of internal control activities. Oftentimes, monitoring activities are periodically performed by internal control reviewers or audit staff, such as internal or external auditors, to verify that each of the five components of internal controls is present and functioning together in an organization.

Monitoring activities are an integral part of a robust internal control system. Monitoring activities may include one or all of the following four exemplary activities:

1. The board and senior management execute oversight over the internal control system, perform periodic internal control reviews, and instruct internal or external audits of departments and functions. For this purpose, the board and management define criteria according to which internal control review activities are performed. 
2. Issues and deviations must be identified and reported to the relevant board sub-committees such as the board audit committee or senior management for resolution.
3. The board or senior management must review the qualifications and independence of the personnel evaluating controls (for example: external auditors, internal auditors, or internal control managers).
4. Internal control issues must be observed and shared with relevant control owners to obtain their response on such issues and observations. 

Final Thoughts

Companies must run their processes as efficiently and effectively as possible in order to be profitable. For obvious reasons, planning how companies carry out these processes is critical to ensuring profitability. However, simply planning their processes is insufficient. Companies must also have systems in place to ensure that their processes run as planned. As a result, these businesses must have an internal control system in place.

Industrial control systems are engineered and designed to provide control, process monitoring, and functions in manufacturing facilities. Control loop systems are implemented within industrial control systems to ensure the desired processes and functions are achieved. Consisting of numerous components, control loop systems utilize programmable software to command the many variables throughout industrial processes in order to meet manufacturing output. Each component in the control loop system works in conjunction to manage the industrial process.

What is a Control Loop?

Control loop systems monitor and regulate the devices, instrumentation, and machines used in industrial or manufacturing processes. The system operates hardware components and software control functions necessary to measure and adjust the variables that affect each process. Consider control loop systems as a process management tool designed to maintain the process variable at a desired set point each step of the way. Process variables are a set of programmable parameters that monitor and control a process to ensure that the output is maintained within a given limit or quantity. Control loop components and instrumentation first measure the variable, respond to it, and then control the variable to maintain it within a set limit.

Control Loop Systems

There are two common control loop systems used in industrial processes. They are the open loop system and the closed loop system. The systems are distinguished by the control actions.

Open-Loop Systems

In an open-loop control system, control actions are independent of the desired output, meaning that the output is not measured or fed back to the input for comparison. Once an input command is applied to a controller it produces an actuating signal. This controlling signal is given as an input to a process which is to be controlled and thus produces a desired output. Essentially, without a feedback system in place, open loop systems operate without any checks and balances and are expected to follow its input command regardless of the final result.

In a tension control open-loop system there are three primary elements: the controller, the torque device (brake, clutch, or drive), and the feedback sensor. The feedback sensor commonly is focused on providing diameter feedback and the process is controlled proportionally to the diameter signal (as opposed to continuous measurement based on direct web feedback like in closed loop systems). As the sensor measures the changes in diameter and relays this signal to the controller, the controller proportionally regulates the torque of the brake, clutch, or drive to maintain tension.

Closed Loop Systems

In a closed loop control system, the control action from the controller is entirely dependent on the desired output. It is fed back through to the input to control the action of the desired output.

Closed loop systems measure, monitor and control the process through feedback to compare the actual output with the desired output. In doing so it greatly reduces error and brings about the desired output or response.

In a tension control closed-loop system there are four primary elements: the controller, the torque device (brake, clutch, or drive), the tension measurement device, and the measurement signal. The controller receives direct material measurement feedback from the load cell or dancer arm. As tension changes, it produces an electrical signal that the controller interprets in relation to set tension. The controller then regulars the torque of the torque output device to maintain the desired setpoint.

Control Loop Components

 

Primary Sensor

Depending on the process, primary sensors are a major component of control loop processes. Sensors supply signals proportional to process variables, such as diameter, dancer position, speed, etc., and measure any change required for a control loop. This information is tied back into the controller to produce finer levels of control.

Web Tension Control Sensors

Load Cell

Load Cells used with moving webs are devices that measure the force applied by the material as a result of micro-deflections of the idler roller they are attached to, caused from tension tightening or loosening as the material travels through the process. This measurement is in the form of an electrical signal (often millivolts) that is sent to the controller for interpretation and utilization in regulating torque to maintain set tension. 

Web Tension Load Cells

Converter

Converters are electro-mechanical devices used for converting electrical energy from the controller to the energy type required to control the torque device. They can be used to convert electrical energy into a pneumatic output, such as an IP Converter, or electrical energy into a DC Voltage for control of motors and magnetic particle torque devices, such as an E/V Converter.

IP Converters & Voltage Converters

Indicator

Indicators are devices that provide a readable indication of an instrument signal in automation and industrial instrumentation systems.

Tension Control Indicators

Recorder

Recorders are devices that log data acquisition. They are used to record measurement data over a given time period. When integrated into industrial control systems the device measures the history of processes and can be submitted for regulatory oversight or monitoring.

Controller

Controllers are integral components in process control systems. The device is responsible for the performance and function of the control system that works to maintain the value of the process variable at set point.

Web Tension Controllers

Actuator

An actuator is a component of a machine that is part of the correcting element responsible for moving and controlling a mechanism or system when it receives a control signal. The actuator converts a signal’s energy into mechanical motion, such as opening a valve.