Chapter 5 - Internal Control Systems Flashcards
What is internal control?
- Process designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance
- affected by board of directors, management and other personnel
- Process rather than an end in itself
- Needs people and what they do, rather than just policy and procedures
- Cannot give 100% assurance, only reasonable assurance
- Adaptable to all org’s
Three key focus areas of internal control
- Operational objectives – operational and financial performance goals + safeguarding assets against loss
- Reporting objectives – internal, external, financial and non-financial
- Compliance objectives – laws and regulations
COSO internal control - integrated framework (COSO Cube):
- Objectives:
* Operations
* Reporting
* Compliance - Components of internal control:
* Control environment
* Risk Assessment
* Control activities
* Info + communication
* Monitoring activities - Levels of org:
* Function
* Operational unit
* Division
* Entity level
Factors that support internal control:
- Organisational structure including responsibility centres
- Integrity and ethical values
- Corporate codes of ethics
How does responsibility centres work?
- Managers are given objectives and degree of autonomy to achieve them
- Managed by establishing performance measures to monitor managers performance
- Poorly defined performance measures could be counter-productive
Types of responsibility centres:
- Cost centres:
* Managers control costs only
* Achieved by fixing inputs and requesting output to be maximised or fixing a set level of output and requesting costs to be minimised
* Cost centres could achieve targets by reducing quality, but would not be goal congruent
* Non-financial controls could include introducing efficiencies in way labour is used - Profit centres:
* Managers control revenues and costs
* Grants more discretion over how profit is maximised or targets achieved (either by reducing costs or increasing revenues)
* Managers have little autonomy over available resources - Investment centres:
* Managers control revenues, costs and investment
* Managers accountable for overall performance using whatever funds allocated
* Assessment using specific targets such as return on investment to provide good incentive
* Non-financial controls could include introducing technology and considering trade-off between investment and operational return
Fundamental principles:
Professional behaviour
Integrity – truthful and honest in all situations
Professional competence and due care
Confidentiality
Objectivity – freedom form bias or discrimination
Ethical threats:
Management responsibility – making management decisions but also being responsible for reviewing them Advocacy Self-review Self-interest Intimidation Familiarity
Why are corporate codes of ethics used?
Used to make statement about how org manages risks such as legal and regulatory requirements as well as moral obligations
Responsibility of board according to the COSO Internal Control - Integrated framework:
- Board is responsible for having an effective system of internal control which senior management operates on their behalf
- Board will be supported by internal and external auditors
What is the responsibilities of the risk management group?
- Building on overall strategy and framework prescribed by the board and risk committee
- Prescribe methods of risk management
- Concentrate on risk responses and monitor risk management
- Report to risk committee and will receive reports from line managers and employees
Responsibilities of internal and external auditors:
- External auditors = concerned with risks that have most impact on figures show in financial accounts
- Internal auditors = more flexible, approach will depend on their focus on controls that are being operated or overall risk management process
Responsibilities of line managers:
- Carry out detailed risk management functions
- Communicating risk management policies to staff
- Preparing reports
- Set a good example
Responsibilities of staff:
- Follow risk management procedures
* Report any concerns relating to risk, failures of existing control measures and variances in budgets and forecasts
What is Management accounting?
Process used for decision making, problem-solving, forward planning. Profit measurement, inventory valuation and performance measurement
What is Strategic Management accounting?
- Provides management accounting info on business and competitive environment in which it operates
- Collection of competitor info and external info
- Exploitation of cost reduction opportunities
- Focus on continuous improvements and non-financial performance
- Matching accounting practices to org’s position and expectations
