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MANAGEMENT INTERNAL CONTROL CONCEPTS AND APPLICATIONS

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Title: MANAGEMENT INTERNAL CONTROL CONCEPTS AND APPLICATIONS


1
MANAGEMENT (INTERNAL) CONTROL CONCEPTS AND
APPLICATIONS
  • Presented by the CSU System Department of
    Internal Auditing

2
AGENDA
  • Introduction
  • Define Internal Controls
  • Examples of Internal Controls
  • Video
  • Headline Case Studies
  • Discussion
  • Reporting Internal Control Breakdowns
  • Conclusion

3
HISTORY OF INTERNAL AUDITING DEPARTMENT AND
REPORTING STRUCTURE
4
INTERNAL AUDITING DEPARTMENT
  • Established at CSU in 1967
  • Reports directly to the Board of Governors Audit
    Committee
  • Reports administratively to the Chancellor of the
    CSU System

5
(No Transcript)
6
PURPOSE
  • To assist members of the organization in the
    effective discharge of their responsibilities.
    To this end, internal auditing provides analyses,
    appraisals, recommendations, counsel, and
    information concerning the activities reviewed.
  • Provide the Board and Management with information
    about the adequacy and effectiveness of the
    Universitys system of internal controls and the
    quality of performance.

7
STAFF MEMBERS
  • Rich Tusa, Vice Chancellor/Director
  • Auditors
  • Allison Horn
  • Stephanie Wolvington
  • Tom Locashio
  • Destiny Halpin
  • Melody Johnson
  • Pablo Machado

8
OBJECTIVES OF TRAINING
  • Understand what internal controls are
  • Understand the importance of internal controls
  • Be able to identify types of internal controls
  • Recognize the internal controls in place within
    your department
  • Implement effective internal controls in your
    area of responsibility
  • Know how to report breakdowns in internal controls

9
WHAT ARE INTERNAL CONTROLS?
10
DEFINITION
  • Internal controls are a system of processes,
    effected by management, designed to provide
    reasonable assurance that the organizations
    objectives are achieved in the following
    categories
  • Effectiveness and efficiency of operations
  • Reliability of financial reporting
  • Compliance with applicable laws and regulations
  • Internal controls are NOT merely more red tape

11
WHY SHOULD YOU CARE?
  • EVERYONE in the University has some
    responsibility for internal control
  • We are each responsible for good stewardship of
    the resources of the State of Colorado
  • Internal controls are effected by people. They
    are not merely policy manuals or forms, but
    people functioning at every level of the
    University.
  • Effective internal controls make our jobs easier
    and help us do our jobs better

12
HOW DO INTERNAL CONTROLS MAKE MY JOB EASIER AND
BETTER?
  • Policies and procedures are established
  • Authority and responsibility are clearly defined
  • Things are done right the first time
  • Expectations are clear
  • The risk that our goals will not be achieved is
    minimized
  • We will know that we are doing the right things
    the right way

13
RELATIONSHIP AMONG INTERNAL CONTROL COMPONENTS
14
COMPONENTS OF INTERNAL CONTROL
  • Control Environment
  • The foundation for all other components of
    control
  • Risk Assessment
  • Identifying and analyzing relevant risks to
    achieving objectives
  • Control Activities
  • Mechanisms needed to provide reasonable assurance
    that organization objectives will be accomplished

15
COMPONENTS OF INTERNAL CONTROL (Continued)
  • Information Communication
  • Helps ensure employees and other constituents are
    aware of information they need to do their job
    and accomplish the organizations goals and
    objectives
  • Monitoring
  • Assess quality and facilitates continuous
    improvement

16
TYPES OF INTERNAL CONTROLS
  • Directive
  • Designed to establish desired outcomes
  • Laws
  • Policies
  • Procedures
  • Manuals
  • Preventative
  • Control mechanism that occurs before a
    transaction or action is performed
  • Training
  • Pre-authorizations
  • Physical control over assets
  • System access controls

17
TYPES OF INTERNAL CONTROLS
  • Detective
  • Control mechanisms that occur after a transaction
    or action is performed
  • Reviews and comparisons
  • Reconciliations
  • Physical counts of inventories
  • Manual
  • An individual is responsible for taking a
    specified action
  • Review for accuracy and compliance prior to
    entering in the financial system

18
TYPES OF INTERNAL CONTROLS
  • Information Technology (Electronic) Controls
  • Technology allows or prohibits actions
  • Passwords, backups, anti-virus (User-based)
  • Restricted access to systems, testing, rejection
    of invalid entries, calculations
    (Application-based)
  • Application development, change control
    (IT-based)
  • Compensating
  • Controls placed in a different area than the
    ideal position to make up for an inability to
    place controls where desired
  • Having only one staff member in a department, so
    entries are reviewed and approved by someone in
    another department.

19
TYPES OF INTERNAL CONTROLS
  • Soft Controls
  • Tone at the top
  • Performance evaluations
  • Training programs
  • Hard Controls
  • Segregation of duties
  • Secondary review and approval
  • Reconciliations

20
LIMITATIONS OF INTERNAL CONTROLS
  • Judgment Decisions are made humans, often under
    pressure and time constraints, based on
    information at hand
  • Breakdowns Employees may not understand
    instructions or may simply make mistakes. Errors
    may result from new systems and processes
  • Management Override High-level personnel may be
    able to override prescribed policies and
    procedures
  • Collusion Two or more individuals, working
    together, may be able to circumvent controls

21
EXAMPLES OF INTERNAL CONTROLS IN EACH COMPONENT
22
CONTROL ENVIRONMENT
  • Foundation of all internal controls
  • Sets the tone of an organization
  • Integrity and ethical values
  • Universitys Code of Ethics
  • Universitys Conflict of Interest Policy
  • Commitment to Excellence
  • Leadership philosophy and operating style
  • Tone at the top based on managements attitudes
    and actions
  • Culture

23
CONTROL ENVIRONMENT (Continued)
  • Organizational structure
  • Competence of workers
  • Training
  • Skill Sets
  • Our most basic internal control is hiring good
    people
  • If effective, it can make other controls easier
  • If ineffective, it is difficult for other
    controls to compensate

24
RISK ASSESSMENT Getting up in the morning
requires a tremendous leap of faithauthor
unknown
  • Risks impact the organizations ability to
    maintain financial strength, a positive public
    image, and product or service quality.
  • Risk cannot be eliminated entirely
  • Establish departmental objectives (what are the
    goals?)
  • Identify external and internal risk to achieving
    those objectives
  • Evaluate and prioritize risks
  • Establish a plan for managing those risks
  • Assess effectiveness
  • Remember The cost of the safeguards must be
    weighed against the impact of the threats. The
    benefit of an internal control must outweigh the
    costs of implementing that control.

25
CONTROL ACTIVITIES
  • Policies and procedures that help ensure
    management directives are carried out and
    necessary actions are taken to address risks
  • Authorization
  • Approvals
  • Segregation of duties
  • Access to assets
  • Security
  • Reconciliations
  • Reviews
  • Documentation

26
INFORMATION COMMUNICATION
  • Encompasses the entire control environment
  • Information systems must provide data that is
  • Relative to established objectives
  • Accurate and sufficient in detail
  • Understandable and in a usable form
  • Timely
  • Knowledge of applicable laws
  • Information must be provided to the right people
    in time to allow appropriate action

27
INFORMATION COMMUNICATION (Continued)
  • Communication must flow up and down the
    organization and across organizational lines
  • Employees duties and responsibilities are
    effectively communicated
  • There are channels to report suspected
    improprieties
  • Employee suggestions for improvement are
    encouraged

28
INFORMATION COMMUNICATION (Continued)
  • How can information be communicated?
  • In person meetings, discussions, one-on-one
  • Technology websites, e-mail, conferencing
  • Through computer programs (systems or
    applications)
  • Reporting or viewing via live applications
  • General ledger, human resources
  • Manipulating data to make it more user-friendly
  • Microsoft Word, Excel, Access, etc.

29
INFORMATION COMMUNICATION (Continued)
  • What controls protect information?
  • Physical controls
  • Locks on file cabinets and doors
  • Document shredders
  • Securing laptops and external data devices
  • Technology-based controls
  • Appropriate access authorization
  • Passwords
  • Data backup and recovery
  • Anti-virus software

30
MONITORING
  • A process that assesses the quality of
    performance over time and aids in identifying
    losses, errors, or irregularities
  • Ongoing monitoring activities
  • Management review of operating and financial
    reports
  • Review and analysis of complaints from external
    sources
  • Comparison of reports with physical assets
  • Evaluation of trends
  • Internal audits
  • Separate evaluations
  • Self assessment
  • External reviews

31
MONITORING (Continued)
  • Monitoring should be a constant in the
    application of internal controls
  • Effective procedures can become less effective
    due to
  • Departure of personnel
  • Lack of training and supervision
  • Time and resource constraints
  • Additional pressures

32
PRESENTATION OF VIDEOPrepared by the
Association of College and University Auditors
(ACUA)
33
CURRENT HEADLINESCASE STUDIES
  • COLLEGE PRESIDENTS GAINS OVERSHADOWED BY SCANDAL
  • Dateline Houston (AP) April 25, 2006
  • President of Texas Southern University
  • Accused of improperly spending
  • 87,000 to furnish her home
  • 138,000 on landscaping and exterior improvements
  • 56,000 on security-related equipment and labor

34
CASE STUDY (Continued)
  • What control breakdowns could cause this to
    happen?
  • Transactions not properly approved
  • Tone at the top
  • Inadequate oversight of senior management
  • Attitude of Thats the way things have always
    been done
  • Others?

35
CURRENT HEADLINESCASE STUDIES
  • ARIZONA STUDENT GROUP SAYS ITS FORMER DIRECTOR
    EMBEZZLED NEARLY 210,000
  • May 12, 2006
  • Director of Arizona Students Association
  • Accused of paying personal bills with student
    funds by
  • Concealing personal expenses, ATM withdrawals,
    and electronic transfers to his personal credit
    card
  • Digitally altering bank statements
  • Presenting counterfeit bank statements to the
    board for review

36
CASE STUDY (Continued)
  • What control breakdowns could cause this to
    happen?
  • Lack of transaction review and account
    reconciliation
  • Suspicious transactions went unnoticed until the
    Director was on extended personal leave
  • Inadequate segregation of duties
  • Opportunity to alter bank statements
  • Opportunity to present altered bank statements to
    the board
  • Others?

37
CURRENT HEADLINESCASE STUDIES
  • SECRETARY CHARGES 383,788, HAS NO RECEIPTS
  • Ex-boss says she was trustworthy, shopped for
    eight departments
  • July 2, 2006
  • Dallas School District Secretary
  • Spent over 380,000 over 2 years and has few
    receipts to substantiate the purchases
  • Made most of the purchases on the weekends
  • Spent over 100,000 at an Air Force base grocery
    store and exchange post
  • Discarded credit card statements and receipts

38
CASE STUDY (Continued)
  • What control breakdowns could cause this to
    happen?
  • Inadequate oversight of purchasing transactions
  • Supervisor did not review purchases made by
    Secretary
  • Supervisor trusted employee and did not feel that
    oversight was necessary
  • Poor record-keeping
  • Did not adhere to record retention requirements
  • Inadequate segregation of duties
  • Secretary initiated AND approved fund transfers
  • Others?

39
DEPARTMENTAL DISCUSSIONS
  • What internal controls are in place in your
    department?
  • Payroll
  • A-Cards
  • Cash Handling
  • Financial Transactions
  • Health Safety
  • Others

40
REPORTING INTERNAL CONTROL BREAKDOWNS
  • ALL employees have a duty to report fiscal
    misconduct (FPI J-3)
  • When to report
  • When controls are not working properly
  • When controls are not in place
  • When controls are being circumvented
  • When fraud is suspected

41
REPORTING INTERNAL CONTROL BREAKDOWNS
  • Who Should I Report This To?
  • Supervisor (Generally, the first person
    contacted)
  • Senior Manager
  • General Counsel 970-491-6270
  • Internal Audit 970-491-6176
  • CSU Police Department 970-491-6425
  • Human Resources 970-491-5793
  • Hotline
  • State Controllers Fraud Hotline 1-888-895-6698
  • Coming Soon CSU Hotline

42
CONCLUSION
  • Questions
  • Handouts
  • Resources
  • Additional News Articles
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