Internal controls are processes instituted by organizations to offer them reasonable guarantees as regards the attainment of their operational, strategic, compliance, and reporting objectives. The appropriateness and efficiency of the controls is assessed via internal, as well as external audits. The audits help ensure that organizations’ operational and financial reporting comply with the applicable regulations as well as laws. One of the critical components of an internal control is risk management. In particular, internal audits help with the evaluation, as well as enhancement, of the effectiveness of their organizations’ risk control processes. Besides, internal audits assist in the designing of organizations’ particular risk management strategies and policies.
The risks for which internal controls are rather important are categorized in three classes. First, strategic risks to internal controls and audits are those stemming from entities or forces that are exterior to an organization, like legislative changes. When the strategic risks materialize, they may affect the organization’s profitability and operational efficiency, including efficiency in putting together precise financial records (Chambers & Rand, 2011; Giove, 2012). Second, accident and operative risks relate to the organizations’ functions. When the accident and operative risks materialize, they may affect the organization’s profitability, efficiency, and operations. The risks include staff malpractices and financial system failures. Third, financial risks are the ones capable of affecting the organization’s liquidity, balance sheet, and profitability (Power, 1999).
The various classes of risks should be assessed continually. Organizations should carry out risk assessments with the aim of making out, as well as evaluating, the risks with the significant chances of impacting on their financial reporting and reporting segments. Such risks commonly include those relating to fraud, loss, and asset misuse. When the assessment outcomes are out, internal control indicators get put in place to make certain that the elementary standards relating to financial reporting are all fulfilled (Rittenberg, Johnstone & Gramling, 2011). Auditors should pass on information regarding critical risk indicators and areas to organizations’ managements. Besides, the managements should be supplied with information on all executed and planned activities aimed at mitigating the identified audit-related risks.