## Components of Internal Control

Internal control has five components. Two commonly tested in exams are Monitoring of Controls and Control Activities.

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### Component 1: Monitoring of Controls

Definition: A process to assess the effectiveness of internal control performance over time.

Key features:

Assessing whether controls are operating as intended
Ensuring controls are modified as appropriate when conditions change
Enabling timely remedial action when control deficiencies are found

Exam trigger phrase: "Whether controls are operating as intended and modified for changes in conditions" → Monitoring of Controls

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### Component 2: Control Activities

Definition: Policies and procedures that help ensure management directives are carried out.

Key feature — Segregation of Duties:

The person recording a transaction is different from the person authorising it
Prevents misstatements arising from concentration of responsibility in one person

Exam trigger phrase: "Segregation of duties / person recording ≠ person authorising" → Control Activities

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### All Five Components (for context)

1. Control Environment

2. Entity's Risk Assessment Process

3. Information System and Communication

4. Control Activities ← segregation of duties

5. Monitoring of Controls ← ongoing effectiveness assessment

Worked example

### Example 1

Scenario (i): CA Amit checks whether controls in LMN Ltd. are operating as intended and whether they are modified for changes in conditions. Which component?

Answer: Monitoring of Controls — it is specifically about assessing whether controls remain effective over time and are adjusted when circumstances change.

### Example 2

Scenario (ii): CA Amit checks whether the person recording a transaction is different from the person authorising it. Which component?

Answer: Control Activities — segregation of duties is a core control activity that prevents misstatement by splitting incompatible functions between different individuals.

⚠️ Common exam mistakes

Mixing up Monitoring of Controls with the Risk Assessment component — monitoring evaluates whether existing controls work, while risk assessment identifies risks the entity faces.
Describing segregation of duties as part of the Control Environment instead of Control Activities.
Listing only two or three components when the question asks to 'explain all components of internal control' — all five must be covered.

Reference: — SA 315 – Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment

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Components of Internal Control – Monitoring and Control Activities

Worked example

⚠️ Common exam mistakes