Internal controls management is a key to effective governance and regulatory compliance. There are ways to strengthen these internal controls: automation via internal controls management software is one. Better documenting internal controls is another.
Whether you are documenting controls for financial reporting or making your internal controls processes better and more robust across your entire risk profile, having a comprehensive approach to document management for internal controls can make all the difference. Here, we explore why documenting internal controls is crucial to an effective internal controls process.
How to Document Internal Controls
While internal controls processes can have limitations, documentation shouldn’t be one. On the contrary, effectively documenting your internal controls can elevate them to the next level.
So, how should you approach internal control documentation?
Documenting Internal Controls: A Step-by-Step Process
The good news is that internal controls documentation can be straightforward if you take a structured approach. Here’s our step-by-step guide to documenting internal controls.
- Risk assessment. Identify the processes and activities that create your most significant risks — the ones where key controls need to be measured and documented. This risk assessment provides the holistic, “top-down” oversight to ensure your internal controls are comprehensive, identifying those controls where documentation is particularly important.
- Put in place a structured internal control framework. This should set out your approach to controls for all the key risks identified in your risk assessment, including setting control objectives/parameters and requirements around documentation. Structuring your approach in this way helps to ensure all risks are captured and documented adequately.
- Document your internal controls. This should record the measures, processes or checks you do to ensure your controls are met. Some processes will naturally be more complex than others and require more detailed documentation. Some, like internal controls for financial reporting, may be mandated by regulations like SOX and need to be documented to specific standards. Typically, smaller companies will be less diligent about documenting internal control processes; fewer employees and processes mean less need for formalized documentation. But if you are a smaller organization, you can get a step ahead by emulating the best practices of larger businesses.
- Be detailed. Your internal controls process will be made up of a range of individual controls; you need to capture all of these to build up the complete picture of your internal control measures. Are any controls dependent on others? For instance, controls for your IT applications may underpin a whole raft of other controls: if your technology and systems don’t work, nor will a host of your operations. Accurately capturing all these controls and their dependencies, documenting whether they are manual or automated and how often they are measured, is vital to documenting internal controls.
- Document responsibility for internal controls. An organization chart may be valuable here; use it to evidence who in your organization takes responsibility for each internal control, and how it is captured and recorded.
- Test your controls and document the results. Controls testing and monitoring is an essential component of the internal controls process. Via sample testing, you must identify and document potential areas where your controls might fail. Note down all the controls that work as they should, and capture any exceptions in a remediation log to be addressed asap.
- Revisit your approach regularly. If exceptions get identified via your controls testing, these need to be dealt with urgently. But even without exceptions, your controls should be tested regularly, and your entire approach revisited periodically. Documenting this process is an essential aspect of documenting internal controls overall.
Internal Control Documentation Examples
How do you document internal controls? You can use spreadsheets or a more narrative approach — possibly a combination of the two. If you use internal controls management software, you will benefit from the advantages this brings, like a centralized library of risks and controls that does the documenting for you.
Alongside more efficient compliant processes, reduced costs, greater confidence in your controls and less potential for human error — a recognized potential weakness of internal controls — automating your internal controls process can help to make documenting internal controls an inbuilt part of your controls design and implementation.
Realize the Benefits of Effectively Documenting Internal Controls
If you are wondering how to document internal controls and processes, hopefully this article has given you a starting point.
Effectively documenting controls will ensure you take a more structured, watertight approach to internal controls management. Responsibilities, authorizations and approvals are clearly set out, with controls-management processes documented to ensure nothing is lost when key personnel change.
Data-driven decisions are made easier, as processes are consistent and clear, and the results captured. Reporting becomes a more straightforward process, with data based on these documented controls and their results.
You can amplify these benefits further if you choose to automate your internal controls management; centralizing risk and internal control resources and capturing all risks, controls and outcomes in a single risk and control library.
Automating controls reduces the risk of human error and the potential for duplicated effort, while changes across your internal controls process are easily cascaded. In addition, documenting internal controls is made stress-free, with documentation created and results collected automatically.
Read our blog Automating Internal Controls: What Does It Entail and What Are the Benefits? to discover more about automating internal controls.