Chapter 24 - Internal Control Flashcards
Definition
- Internal control
is broadly defined as a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
- Effectiveness and efficiency of operations.
- Reliability of financial reporting.
- Compliance with applicable laws and regulations.
Tone at the Top
A good system of internal control begins, first and foremost with a high level of corporate integrity and ethical values.
A positive “tone at the top” is prerequisite for establishing appropriate policies and procedures at all organizational levels.
The commitment to a positive tone at the top begins with the organization’s board of directors, audit committee, and chief executive officer and filters down through all levels of corporate management.
Objectives of Internal Control System
Accomplishment of Organizational Objectives
Management is responsible for defining and establishing the organization’s basic business objectives.
An internal control system by itself cannot ensure that an entity will achieve its basic business objectives.
Objectives of Internal Control System
Safeguard Assets
Internal control systems should take into consideration such factors as prevention of the asset/resource loss through theft, waste, or inefficiency. In addition, considerations such as selling the product at too low a price, extension of credit to bad risks, failing to retain key employees, taking steps to prevent patent infringement, and incurring unforeseen liabilities or contingencies should be factored into an effective internal control system.
Objectives of Internal Control System
- Integrity and Reliability of Reporting
1. Financial Reporting
2. Management Information
Internal control systems should be designed to ensure that financial reporting and management information is reliable and useful.
Management information is needed at all levels of the organization to run the business and to achieve the entity’s objectives
Objectives of Internal Control System
Effectiveness and Efficiency of Operations
The COSO Report suggests an internal control system is effective when the board of direc- tors and management have reasonable assurance that:
- They understand the extent to which the entity’s operations objectives are being achieved.
- Published financial statements are being prepared reliably.
- There is compliance with applicable laws and regulations.
(Committee of Sponsoring Organizations of the Treadway Commission) COSO
Objectives of Internal Control System
Cost/Benefit Considerations
The decision to implement a particular internal control system is influenced greatly by the resources and associated costs that are needed and the perceived benefits of it.
- Element of an Internal Control System
Internal control system components can be divided into two categories:
(1) basic features applicable to all internal control systems, and
(2) specific control features applicable to the life insurance industry.
Elements Of An Internal Control System
two categories: (1) basic features applicable to all internal control systems, and (2) specific control features applicable to the life insurance industry.
- Basic Internal Control Features?
Budget Authorization Procedures Personnel Policies and Practices Segregation of Duties Physical Controls Documentation and Communication Monitoring Information Systems Controls
Elements Of An Internal Control System
two categories: (1) basic features applicable to all internal control systems, and (2) specific control features applicable to the life insurance industry.
Basic Internal Control Features
Budgeting
A primary function of management in determining whether corporatewide controls are being followed lies in developing realistic budgets and comparing actual perform- ance with expected performance.`
Elements Of An Internal Control System
two categories: (1) basic features applicable to all internal control systems, and (2) specific control features applicable to the life insurance industry.
Basic Internal Control Features
Segregation of Duties
There are four basic segregation rules that contribute to the effectiveness of an internal control system:
1) segregating custody of assets from accounting;
2) segregating custody of assets from authorization;
3) segregating record keeping from operations; and
4) separating individual accounting tasks.
Elements Of An Internal Control System
two categories: (1) basic features applicable to all internal control systems, and (2) specific control features applicable to the life insurance industry.
Basic Internal Control Features
Monitoring
is the process that assesses the quality and effectiveness of an internal control system over time. This process is used first to ensure that existing controls are working, and second to ensure that changes to the control system are proper and func- tioning as expected.
Elements Of An Internal Control System
two categories: (1) basic features applicable to all internal control systems, and (2) specific control features applicable to the life insurance industry.
- Basic Internal Control Features
Information Systems Controls
Information systems controls are typically classified into two groups, general and application controls.
General controls are those which apply to many if not all appli- cations processed by the data center. Application controls are those which are written for and used to control the processing of a single application. Together these controls help ensure the accuracy and validity of the information obtained through the system.
- General controls, which can apply to all sizes and types of computer systems, typi- cally include controls related to the data center operations, system software, applica- tion development, and system and file access.
- Application controls are built into each application and are designed to control the completeness and accuracy of transaction processing.
Specific Life Insurance Accounts and Activities
- Accounts or activities that are unique to the insurance industry include:
Underwriting and Premium Income Benefits and Claim Liabilities Policy Reserves and Insurance In-force Agent Commissions Reinsurance
Roles and Responsibilities
*Five particular groups play key roles in the development, maintenance, and testing of the internal control system.
(1) the board of directors,
(2) audit committee,
(3) operating management,
(4) internal auditors, and
(5) independent auditors.
