INTERNAL CONTROL

1
INTERNAL CONTROL

• Policies and procedures established and
  maintained by management to assist in achieving
  its objectives of ensuring the orderly and
  efficient conduct of the entitys business.

2
MANAGEMENTS OBJECTIVES

• Optimal use of resources
• Prevent or detect error or fraud
• Safeguard assets
• Provide timely, accurate information

3
AUDITORS OBJECTIVES

• Assessing control risk related to financial
  statement assertions at the account balance or
  class of transactions level
• Policies and procedures that affect control risk

4
ELEMENTS

• 1. CONTROL ENVIRONMENT
• 2. ACCOUNTING SYSTEM
• 3. CONTROL PROCEDURES

5
CONTROL ENVIRONMENT

• Collective effect of factors that establish,
  enhance, or reduce the effectiveness of policies
  and procedures
• attitude, awareness, commitment, and actions of
  board of directors, management, owners, and other
  re the importance of control

6
ACCOUNTING SYSTEM

• valid transactions
• proper classification
• valuation
• timing
• completeness
• authorization
• disclosure

7
CONTROL PROCEDURES

• Policies and procedures that
• collect, record, process data and report
  information
• enhance the reliability of the information

8
CONTROL PROCEDURES - SPECIFIC

• Authorization of transactions
• Adequate documentation
• Safeguards over assets and records
• Independent checks on performance
• Adequate segregation of duties

9
LIMITATIONS OF INTERNAL CONTROL

• cost vs.. benefits
• not directed at unusual transactions
• human error
• varying efficiency with volume of transactions
  and changes in staff
• collusion
• deliberate override of controls

10
AN APPROACH TO INTERNAL CONTROL QUESTIONS

• REMEMBER THE AUDIT OBJECTIVES
• REMEMBER THE SPECIFIC CONTROL PROCEDURES
• WATCH FOR WHAT IS NOT GIVEN IN THE PROBLEM
• IF A FORMAT IS SUGGESTED - USE IT
• BE SPECIFIC - WHAT COULD HAPPEN IF WEAKNESS IS
  NOT CORRECTED
• BE PRACTICAL AND REALISTIC