Internal Control Consideration Flashcards
Internal Control
Process designed, implemented, and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to
a. reliability of finacial reporting
b. Effectiveness and efficiency of operations
c. Compliance with applicable laws and regulations
Characteristics of Internal Control
- It is a process
- It is effected by entity’s personnel
- It provides reasonable assurance of achieving its objectives
- Geared toward attainment of entity’s objectives
Inherent limitations that may affect effectiveness of internal controls (COC CHA)
- Cost-benefit consideration
- Management overriding the controls
- Collusion with parties outside the entity
- Changes in conditions
- Human error
- Controls tend to be directed at anticipated types (routine) of transactions instead of non-routine transaction
Controls
Policies or procedures that an entity establishes to achieve the control objectives of management or those charged with governance.
Areas of Internal Control
- Administrative Control-promotes operational efficiency and adherence to managerial policies
- Accounting Control- plan of organization and the procedures and records that are concerned with the safeguarding of assets and the reliability of financial records
Accounting System
Series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records
Internal Control System
All the policies and procedures adopted by management of an entity to assist in achieving management objectives
Parties Responsible for Internal Control
- Management and those Charged with Governance- have responsibility of making sure the internal control is adequate
- Internal Auditors- ensuring the adequacy of the internal control and efficient use of resources
- External Auditor- assess the effectiveness of internal control within an organization to plan the audit
Component of Internal Control (CRIME)
- Control Activities
- Entity’s Risk Assessment Procedure
- Information and Communication System
- Monitoring of Controls
- Control Environment
Direct vs Indirect Controls
Direct- controls that are precise enough to address the risk of material misstatements.
(Information and Communication Systems and Control Activities)
Indirect- Controls that are not sufficiently precise to prevent, detect, or correct misstatements at the assertion level
(Control Environment, Entity’s Risk Assessment Procedures, and Monitoring of Controls)
Control Environment
Set of standards, processes and structures that provide a basis for carrying out of internal control. Also the foundation on which an effective system of internal control is built and operated in an organization
Elements of Control Environment (OLD)
- Communication and Enforcement of the Integrity and Ethical Values
- Management Philosophy and operating style
- Commitment to competence
- Participation of those charged with governance
- Assignment of Authority and responsibility
6.Human Resources policies and procedures - Organizational Structure
Elements of Control Environment (NEW)
- Management’s commitment to integrity and Ethical Values
- TCWG’s independence from management and exercise oversight of the entity’s system of internal control
- Entity’s Assignment of Authority and Responsibility and pursuit of its objectives
- Attraction and Development of Competent individuals
- Individuals are held Accountable for their responsibilities
What are the Entity’s Risk Assessment Procedures
- Identifying business risk relevant financial reporting objectives
- Assessing the significance of risk and likelihood of occurrence
- Decide how to manage those risks
Monitoring of Controls
Process of assessing the quality of internal control performance over time which includes assessing the design and operations of controls on a timely basis and takin necessary corrective actions
