Best Practices for Developing Internal Controls for Your Business

Most organizations assume their internal controls are working until a failed audit, inaccurate financial reporting, or a missed regulatory requirement proves otherwise. The real risk is relying on controls that don’t work as intended.

An effective internal control framework does more than prevent errors. It ensures day-to-day business operations run efficiently, information systems are protected, and your team can act quickly when new risks emerge.

In this guide, we break down the five key components of internal control, explain how to design the right types of internal controls, and outline best practices for implementation, remediation, and oversight.

What Are Internal Controls?

Internal controls are the policies, procedures, and safeguards organizations put in place to protect assets, prevent loss, and validate operational integrity.

There are three general types of controls:

Preventive controls stop unwanted events before they happen (e.g., access restrictions, approval workflows).
Detective controls identify and flag adverse events after they’ve occurred (e.g., audit logs, security alerts).
Corrective controls help fix the issues and address underlying vulnerabilities (e.g., system patches, policy updates).

In cybersecurity, internal controls span across physical, network, and information security layers, which cover everything from configuration management to personnel access and authentication.

To manage this complexity, organizations often rely on structured frameworks that help apply controls consistently across systems and environments.

What Are the 5 Components of Internal Controls?

Below we discuss the five major components of internal controls.

1. Control Environment

This is the foundation for all other components and reflects the organization’s attitude toward internal controls. Leadership sets the tone, and the rest of the organization follows.

An effective control environment should include:

A clear commitment to integrity and ethical values.
Active, independent oversight by the board of directors.
Well-defined organizational structures, roles, reporting lines, and authorities.
A focus on attracting, developing, and retaining qualified personnel.
Accountability for fulfilling internal control responsibilities at all levels.

2. Risk Assessment

Risk assessment of internal controls is important because it forms the basis for how risks should be managed and mitigated.

Key aspects of an effective risk assessment:

Clearly defined and measurable objectives.
Identification of risks that threaten the achievement of those objectives.
Consideration of the potential for fraud.
Evaluation of risks related to significant internal or external changes.

3. Control Activities

These are the actions established by policies and procedures that help ensure management directives are carried out. Control activities should be performed at all levels of the organization and at various stages within business processes.

To be successful, control activities should:

Address the risks identified in your risk assessment.
Be clearly documented and communicated to stakeholders and staff.
Evolve with the changing needs of the business.

4. Information and Communication

Reliable information and clear communication are critical for effective internal controls. This includes both internal and external communications.

Information and communication systems should:

Facilitate the generation, gathering, and use of quality information throughout the enterprise.
Define the processes for internally and externally communicating information about internal controls.

5. Monitoring Activities

Monitoring checks the quality of internal controls over time. This involves both continuous and periodic evaluations.

Effective monitoring activities include:

Ongoing assessments and/or separate, independent evaluations.
Timely identification and reporting of control deficiencies.
Clear protocols for correcting and following up on identified issues.

Step-by-Step Guide to Implementing Internal Controls

Developing an internal control system requires a structured, phased approach grounded in risk awareness, process integrity, and organizational accountability. Follow these key steps to design and implement a framework that works for your business.

1. Establish Your Internal Control Environment

The control environment is the foundation for all internal control efforts. It sets the tone for ethical behavior, accountability, and how seriously internal controls are taken across the organization.

Key actions to take:

Define and promote your organization’s core values and code of conduct.
Establish board and senior leadership buy-in so they set the “tone at the top”.
Build a cross-functional internal control team, ideally including senior leadership, the CISO, compliance officer, privacy lead, and representatives from product teams.
Assign roles and clearly communicate expectations for ethical behavior, regulatory compliance, and internal controls.

A strong control environment enables all other components to function effectively. It also empowers team members to uphold integrity and identify risks.

2. Identify and Analyze Risks

Before you can manage risk, you need to know where it exists. Start by conducting a comprehensive risk identification across the business.

Steps in this process:

Catalog all significant risks, including operational, technology, third-party, regulatory compliance, and cybersecurity threats (e.g., those tied to SaaS, IaaS, PaaS platforms).
Group risks by type to make reporting and risk management more efficient.
Consider fraud risk, misconduct, and emerging external threats.
Use a risk assessment framework to evaluate the likelihood and impact of each risk.

Risk assessment stages:

Develop criteria (e.g., high/medium/low) to establish consistency in rating risks across teams.
Assess each risk through surveys, interviews, workshops, or benchmarking.
Prioritize based not just on financial impact, but also on qualitative factors like reputational harm, safety risks, and system vulnerabilities.

Once your risk profile is clear, begin developing mitigation strategies for the highest-priority items first.

3. Design and Implement Control Activities

Control activities are the specific tools used to mitigate risks identified in your assessment.

These may include:

Access controls and segregation of duties
Employee training
System audits and monitoring
Performance evaluation
Approval workflows and reconciliations

4. Develop Information and Communication Channels

Effective communication ensures that everyone involved understands their responsibilities related to internal controls.

Focus areas:

Make current policies and procedures easily accessible.
Distribute timely updates that are shared across departments via meetings, documentation, or emails.
Create channels for escalating issues or reporting violations confidentially.

Clear internal communication aligns teams and builds a shared understanding of control objectives and how individual actions contribute to business integrity.

5. Establish Monitoring Activities

Monitoring confirms that internal controls are functioning properly and identifies areas for improvement.

Key steps are to:

Conduct routine evaluations of the five components of your internal control system.
Document any control deficiencies and escalate them to senior management or the board, as needed.

Besides continuous monitoring, schedule periodic internal control reviews, broad assessments that evaluate the effectiveness of your entire control framework across all business units.

Monitoring should not only detect gaps, but also inform leadership of whether controls are keeping pace with risk and regulatory change.

Review Internal Controls with ZenGRC

ZenGRC streamlines the entire internal control process by automating risk assessments, mapping controls to frameworks like COSO, and delivering real-time visibility into your control environment. With built-in workflows and integrations, ZenGRC enables your team to monitor effectiveness, respond to changes, and keep internal controls aligned with changing business goals.
Schedule a demo to see how ZenGRC can simplify internal control management.