6-2-2 Internal control
“Internal control” and “IT governance” are means of ensuring sound
management.
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Internal control
“Internal control” involves constructing a system for the company to engage in business activities in an appropriate manner.
(1)Purposes of internal control
Internal control serves four purposes in the support of business activities.
The purposes of internal control are summarized below.
●Efficiency and effectiveness
“Effectiveness of operations” refers to the degree to which business objectives are being achieved. “Efficiency of operations” refers to the rational use of time, human resources, costs, etc. to achieve the objectives.
The achievement of business objectives is supported by putting together a
system by which to measure and evaluate the degree of achievement and
rationality.
●Reliability of financial reporting
A system is put together to prevent false information from finding its way
into financial reports and thereby support the reliability of financial reporting.
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●Compliance with laws and regulations
A system is put together to ensure compliance with laws, standards, regulations,
etc. related to the business activities in order to support legal compliance.
(2)Basic elements of internal control
Internal control is comprised of six basic elements that are required in order to fulfill each of the above purposes. These elements are taken from the
“COSO Framework,” which is the global standard for internal control.
The basic elements of internal control are summarized below.
●Control environment
A proper environment (climate) must be set up within the organization.
Putting together a better environment affects the awareness of everyone
within the organization and provides the foundation for the basic elements.
Reference
COSO
Service management
●Protection of assets
A system is put together to ensure that acquisition, use and disposal of assets is
carried out in accordance with appropriate procedures and thereby support the
protection of the company’s assets.
“COSO” is an organization established
by organizations such as the American
Institute of Certified Public Accountants
in response to the numerous incidents
of accounting fraud and management
failures in the 1970s and 80s.
The “COSO Framework” was announced in 1992. The “COSO Cube” is
a graphical representation of the COSO
Framework.
Abbreviation for “Committee of Sponsoring Organizations of the Treadway
Commission.”
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