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INTRO TO INTERNAL CONTROL

Internal Control can be defined in a broad or narrow sense/

procedures designed to minimize risk of loss info assets!

"road #iew e$uates internal control wit% management control

i!e! t%e process b& w%ic% managers assure t%at resources are

obtained and used effecti'el& and efficientl& in t%e

accomplis%ment of organizational goals!()anagement sets t%e

tone for t%e organization*

Culture/En'ironment+%ow are t%ings done t%ere,,,+

Narrow #iew restrict internal control to its relations%ip to t%e

accounting s&stem e'en more narrowl& to its relations%ip wit%

t%ose aspects of t%e accounting s&stem t%at effect t%e financial

statements!

Auditors are re$uired to e'aluate internal control in t%e second

standard of field work w%ic% states-

A sufficient understanding of internal control structure is to be

obtained to plan t%e audit and to determine t%e nature timing

and e.tent of tests to be performed!

A 012

Internal control comprises t%e plan of organization

3 all t%e coordinate met%ods 3 measures adopted wit%in abusiness!

1! afeguard its assets

4! C%eck t%e accurac&3reliabilit& of its accounting data

0! 5romote operational efficienc&

6! Encourage ad%erence to prescribed managerial polic&!

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Internal control includes controls w%ic% ma& be classified as

eit%er accounting or administrati'e controls!

A 012

I! Accounting controls comprise t%e plan of organization andall met%ods and procedures t%at are concerned wit% and relate

directly to, the safeguarding of assets and the reliability of financial

records. T%e& generall& include suc% controls as t%e s&stems of

aut%orization and appro'al separation of duties concerned wit%

record keeping and accounting reports from t%ose concerned

wit% operations or asset custod& p%&sical controls o'er assets

and internal auditing!

II! Administrati'e controls comprise t%e plan of organization

and all met%ods and procedures t%at are concerned mainl& wit%

operational efficienc& and ad%erence to managerial policies and

usuall& relate onl& indirectly to the financial records, i.e.

performance reports, employee training programs, quality controls.

(such as a gym, daycare, cafeteria)

T%e independent auditor is primaril& concerned wit% t%e

accounting controls !

7undamental Control Ob8ecti'es

i!e! statements of desired results orpurposes to be ac%ie'ed 9ualit& of information

accurate complete rele'ant timel& ecurit& o'er Resources

Compliance wit% internal and e.ternal rules 3 regulations

Efficient Operations

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pecific Control Ob8ecti'es+Two primar& categories

:eneral Control Ob8ecti'es + t%ose relating to t%einformation ser'ices function t%e internal audit function

s&stems de'elopment and maintenance s&stems operation

data bases distributed data processing E;I LANs e.perts&stems microcomputers

impro'ements in consistenc& introduced b& computer processing ma& process large numbers of transactions incorrectl&

computer must be programmed to detect errors

does not %a'e t%e benefit of %uman o'ersig%t

In%erent 's! Control Risk

in%erent risk + t%e risk t%at t%e error or irregularit& willoccur

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control risk + t%e risk t%at t%e error or irregularit& willoccurand not be detected b& t%e control in place + t%e riskt%at t%e control will fail to meet its ob8ecti'e

T&pes of Risks

inade$uate training de'elopment and super'ision ofpersonnel

errors and irregularities in transaction aut%orization

errors and irregularities in dataentr& transmittal andstorage

s&stem failure

s&stem inabilit& to meet organizationanduser needs e.cessi'e %ardware and software ac$uisition e.cessi'e operating and maintenance costs

inefficient use of s&stem resources

t%eft of assets

computer abuse

fradulent financial reporting

concealment of illegal acts

?%o bears ultimate responsibilit& for t%e financial statements,

An effecti'e accounting s&stem- (A 012*

1! Identifies and records all validtransactions!

4! ;escribes transactions on a timely basisand in sufficient detail

to permit proper classificationof transactions for financial

reporting!

0! )easures t%e 'alue of transactions in a manner t%at permits

recording t%eirproper monetary value!

6! ;etermines t%e time periodin w%ic% transactions occurred to

permit recording of transactions in t%e proper accounting period!

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@! 5resents properl& t%e results of transactions and related

disclosures in financial reports!