What Is a Control Activity and Why Is It Important?

In any business, a set of actions and policies known as control activities ensures that operations run smoothly and goals are met. These are the specific procedures a company implements to manage risks, prevent fraud, and ensure the accuracy of financial reporting. They form the backbone of a company’s internal stability and operational integrity.

The Core Purpose of Control Activities

Control activities are actions established through policies and procedures that help ensure management’s directives to mitigate risks are carried out. Their primary function is to reduce the chances of errors, fraud, or policy violations that could prevent a company from achieving its objectives. These objectives can be broad, such as maintaining profitability, or more specific, like ensuring all financial statements are accurate and comply with regulations. Control activities are performed at all levels of an organization and across all its departments.

These activities are a component of the COSO Internal Control—Integrated Framework, a model many companies use to design and evaluate their internal control systems. They are the practical steps taken to address the risks identified in the risk assessment process. The goal is to create a structure where potential problems are managed so the company can operate effectively and ethically.

The selection and development of these activities are tailored to the specific risks an organization faces. For instance, a retail business might focus on controls over cash handling and inventory, while a software company might prioritize controls over data security and intellectual property. By implementing a thoughtful mix of controls, a business can protect its assets, produce reliable financial records, and maintain compliance with laws and regulations.

Key Categories of Control Activities

Control activities are broadly sorted into three functional categories based on when they are performed: preventive, detective, and corrective. Each type serves a distinct purpose in a company’s overall risk management strategy.

Preventive Controls

Preventive controls are proactive measures designed to stop errors or irregularities from happening in the first place. One of the most common examples is the segregation of duties, which ensures that no single individual has control over all aspects of a financial transaction. For example, the person who approves payments should not be the same person who signs the checks, reducing the risk of unauthorized disbursements.

Other preventive controls include requiring managerial approval for expenditures over a certain amount, pre-employment background checks, and password policies that safeguard digital assets.

Detective Controls

Detective controls are designed to find problems after they have already occurred. While preventive controls are the first line of defense, they are not foolproof, so detective controls act as a second line. A classic example is a monthly bank reconciliation, where a company compares its cash records to the bank’s statement to identify any discrepancies.

Physical inventory counts are another detective control, where periodically counting all inventory and comparing it to accounting records can detect theft or damage. Internal audits also serve as a detective control, providing an independent assessment of a company’s processes to uncover weaknesses.

Corrective Controls

Once a detective control uncovers a problem, corrective controls are put into action to fix it and prevent it from recurring. For instance, if a bank reconciliation reveals an accounting error, an adjusting journal entry is a corrective control used to fix the financial records. If an internal audit discovers that employees are not following a specific policy, corrective actions might include retraining those employees or modifying the process to close the gap.

Manual Versus Automated Controls

Control activities can be performed by people (manual controls) or by systems (automated controls). Most organizations use a combination of both to create a robust internal control framework.

A manual control relies entirely on human action. Examples include a manager physically signing an invoice to approve it for payment, an employee conducting a physical count of inventory, or a supervisor reviewing an expense report. These controls are necessary for situations requiring judgment, but they are also susceptible to human error, oversight, or collusion.

Automated controls are built into an organization’s IT systems and perform actions automatically based on predefined rules. For instance, a system can be configured to automatically block a payment to a vendor if the invoice amount does not match the purchase order and receiving report—a process known as a three-way match. Other examples include system-enforced password complexity rules or automated alerts for unusual transaction patterns.

Automated controls offer greater consistency and efficiency, as they can process large volumes of transactions without error. They also enhance the segregation of duties by systematically restricting access to certain functions within an application. While they require an initial investment, they can significantly reduce risk and provide more reliable information for monitoring the business.

Applying Controls Across Business Functions

Controls can be categorized by where they are applied: at the entity level, affecting the entire organization, or at the transaction level, specific to a particular process. A well-controlled organization integrates both types of controls.

Entity-level controls are broad policies and procedures that set the overall tone for the organization and create the foundation for the control environment. Examples include a formal code of conduct, robust hiring and training policies, and company-wide IT security protocols. These controls demonstrate management’s commitment to integrity and apply to everyone in the company.

Transaction-level controls are applied within a particular business process to ensure individual transactions are handled correctly. Consider the “procure-to-pay” cycle, which covers all steps from purchasing goods to paying the supplier. This process begins with a purchase requisition, which may require managerial approval (a preventive control). Once goods are received, a report is created and matched against the purchase order and vendor invoice (a detective control). Finally, the payment is processed with a segregation of duties between the person authorizing the payment and the person disbursing the funds.