Internal Controls 101: Understanding the Basics for Early Career Professionals

Part of the Early Career Professional Series

The purpose of the Early Career Professional Series of articles is to help professionals who are new to second line of defense topics such as AML/CFT, Sanctions, Fraud, consumer regulatory compliance, vendor management, controls, and other risk management areas understand the foundational concepts that support risk management.

Internal controls are the processes and procedures that organizations put in place to protect assets, ensure reliable reporting, and keep operations running smoothly. You can think of them as the guardrails that keep a business on track. Their purpose is to provide reasonable assurance—not absolute guarantees—that an organization will achieve three objectives: effective operations, reliable financial reporting, and compliance with laws and regulations.

There are different types of internal controls. Preventative controls are proactive, stopping problems before they occur, such as requiring purchase approvals, using password protection, or installing security cameras. Detective controls identify issues after they happen, such as bank reconciliations or performance reviews. In some cases, organizations rely on compensating controls, which act as backup measures when primary controls are missing or ineffective. Regardless of type, the main purpose of internal controls is to safeguard both physical assets (like cash, inventory, or equipment) and information assets (like customer data and financial records) while ensuring tasks are carried out consistently.

The Three Objectives of Internal Controls & Responsibility

A well-designed control system addresses three interconnected goals:

• Operations objectives: Safeguard assets, reduce waste, and ensure resources are used effectively.
• Reporting objectives: Ensure financial and operational reports are accurate, timely, and transparent.
• Compliance objectives: Keep the organization aligned with laws, regulations, and internal policies.

These areas work together. Strong operational practices support accurate reporting, and accurate reporting helps ensure compliance.

Who is Responsible for Internal Controls?

Internal controls are not just the responsibility of the accounting department—they involve the entire organization.

• Management is responsible for designing, implementing, and maintaining controls. They also set the “tone at the top” by modeling ethical behavior.
• Employees carry out control activities and report problems. Even the best controls fail if they are ignored.
• Boards or risk committees provide oversight, reviewing the effectiveness of controls and ensuring weaknesses are addressed.

Controls work best when everyone understands their role and takes ownership.

The Five Core Components of Internal Controls

While several internal control frameworks exist, the components below will take the new professional through the basics of what internal controls are all about.

1. Control Environment – The Foundation

The control environment reflects the culture of accountability and ethics within the organization. Leadership behavior plays a critical role here. When leaders consistently follow procedures, they send a message that rules matter. When they bypass controls, employees notice that too. A strong environment also requires clear reporting lines and accountability, so that errors and fraud do not go unnoticed.

2. Risk Assessment – Identifying Vulnerabilities

Organizations must ask: what could go wrong? Risks vary depending on the objective—protecting financial statements, securing data, or managing inventory. Risk assessment is not a one-time exercise. Since regulations, technology, and business conditions evolve, risks must be reviewed regularly. Both likelihood and impact should be considered, since rare but severe risks may need special attention.

3. Control Activities – Policies and Procedures

Control activities are the everyday actions that manage risks. Examples include:

• Approvals and authorizations to review transactions.
• Reconciliations that compare two data sets to ensure accuracy.
• Segregation of duties so no one person controls a process from start to finish.
• Physical and IT controls that protect assets and data.

4. Information and Communication – Sharing Knowledge

Controls depend on good information flow. Employees need accurate, timely data to do their jobs, and organizations must have clear channels for reporting issues. Written policies, training materials, and consistent documentation make procedures easier to follow and maintain over time.

5. Monitoring Activities – Ongoing Evaluation

Even the best-designed controls can weaken if they are not monitored. Regular management reviews, audits, and performance comparisons help identify gaps. When problems arise, they should be documented, corrected quickly, and tracked to prevent repeat issues.

Basic Internal Control Procedures

Segregation of Duties

One of the most important principles of internal controls is ensuring that no single employee has too much control over a transaction. Ideally, responsibilities are divided so that:

• One person authorizes the transaction,
• Another records it, and
• A third maintains custody of the asset.

Small organizations may not be able to separate all duties, but compensating controls can help. For example, a senior manager might review reconciliations and approvals to provide oversight. High-risk areas—such as cash handling, vendor management, and payroll—require special attention.

Documentation and Record-Keeping

Good records prove that procedures are followed and allow issues to be spotted quickly. Organizations should:

• Use pre-numbered documents such as receipts or invoices.
• Track all numbers to avoid missing transactions.
• Maintain organized and secure filing systems.
• Follow records retention policies that meet legal requirements.

Physical and IT Controls

Physical controls protect tangible assets with locks, safes, alarms, or restricted access. IT controls protect digital information through unique passwords, role-based access, backups, and security software. Since employees are often the first line of defense, training them to recognize phishing attempts or practice good password hygiene is a simple but powerful safeguard.

Implementing and Maintaining Controls

Below is a basic how-to in terms of getting started.

• Conducting a Risk Assessment

Organizations should begin with a simple risk assessment: identify risks in each area, consider what could go wrong, document current controls, evaluate their effectiveness, and identify gaps. In regulated industries, published regulatory guidance can provide useful insight into expected risks and controls.

• Developing a Checklist

After identifying risks, organizations should create a checklist to keep control activities on track. A practical checklist includes each control, who is responsible for it, and how often it should be reviewed. Daily tasks, such as cash counts, might appear alongside monthly or quarterly tasks, such as reconciliations. The key is to start with high-risk areas and keep the list realistic.

• Training Employees

Controls only work if people understand them. Training should explain the purpose of controls, provide step-by-step instructions, and use real-life examples to make the lessons relevant. Employees should also feel safe reporting problems, and organizations may want to offer anonymous reporting options for sensitive situations.

• Monitoring and Continuous Improvement

Controls are not “set it and forget it.” They should be reviewed regularly, with warning signs such as shortages, customer complaints, or unusual transactions taken seriously. As organizations grow, controls should adapt to new functions and risks. When failures happen, they should be documented, corrected, and communicated to prevent future problems.

Conclusion

Internal controls may sound complex, but they are really about creating a structure that protects resources, ensures accuracy, and builds trust. For early career professionals, understanding the basics provides a strong foundation for contributing to your organization’s success. By learning the objectives, components, and procedures of internal controls—and by recognizing that controls involve everyone—you can see how even small actions in your daily work support the bigger picture of organizational integrity and resilience.

For more information, be sure to register for the live or on-demand webinar in our library entitled:

“Internal Controls 101: A guide to getting started”