Corporate Governance Flashcards
5 Components of Internal Control
- The Control Environment
- Risk Assessment
- Control Activities
- Information and Communication
- Monitoring
Factors of Control Environment (CHOPPER)
- Commitment to competence
- Human resource policies and procedures
- Organizational structure
- Philosophy and operating style of management
- Participation of the board of directors or audit committee
- Ethical and integrity values
- Responsibility and authority assignment
Types of Control Activities (PIPS)
- Performance reviews
- Information processing
- Physical Controls
- Segregation of duties
Segregation of Duties (ARCC)
- Authorization of transactions
- Recording of transactions
- Custody of assets
- Comparisons
Monitoring - Sequence of Activities
- Control Baseline
- Change Identification
- Change Management
- Control Revalidation/Update
Control Baseline
Development of an understanding of how the system of internal controls was designed and implemented
Change Identification
Use of ongoing and separate evaluations t identify and address changes in the effectiveness of I/C to initiate changes to controls
Change Management
Determination of when changes to I/C are needed and the types of changes that are likely to be effective
Control Revalidation/Update
Development of a new baseline understanding of the revised system
Limitations of Internal Controls (COCCO)
- Collusion
- Override by Management
- Competence
- Cost/Benefit Constraints
- Obsolescence
Purpose of ERM
Find the balance between minimizing or managing risk and maximizing the return and opportunities that can be provided to stakeholders
8 Components of ERM
- Internal Environment
- Objective Setting
- Event Identification
- Risk Assessment
- Risk Response
- Control Activities
- Information Communication
- Monitoring
ERM - Internal Environment
Tone at the top
Starts with Mission Statement
ERM - Objective Setting
Objectives the companies set to meet its mission statement. 4 Types of Objectives 1. Strategic Objectives 2. Operational Objectives 3. Reporting Objectives 4. Compliance Objectives
ERM - Event Identification
How to distinguish between events that are opportunities and threats and how to deal with them
Risk Assessment
Evaluation of the extent of potential effects of identified events on the ability of the entity to achieve its objects
3 Approaches to Risk Assessment
- Balance Sheet Approach
- Process Approach
- Event Identification Approach
ERM - Risk Response
Mgt.'s response to risk it is exposed to. 4 Responses 1. Acceptance 2. Share 3. Reduce 4. Avoid
3 Approaches to quantify risks
- Benchmarking - compares expected outcomes to common measures
- Probabilistic Models -uses probabilities of possible outcomes
- Nonprobabilistic Models - uses subjective assumptions to measure possible outcomes
ERM - Control Activities
Procedures to make sure decisions follow on how to respond to risk are carried out Activities: 1. Top-level Reviews 2. Activity Management 3. Information processing 4. Physical Controls 5. Performance Indicators 6. Segregation of Duties (ARCC)
