Elements of Internal Control

Elements of Internal Control

1. Internal Control

   • a process
     • effected by the BOD, management and other personnel
       • designed to provide
         • a reasonable assurance
           • regarding achievement of objectives in
             • effectiveness & efficiency of operations
               • reliability of financial reporting
                 • compliance with applicable laws and regulations

2. Categories of Risks (FOC)

   • FINANCIAL
     • risks of errors or fraud in accounting systems
     • failure to record financial transactions in the book-keeping system
     • failure to collect money owed by customers
     • failure to protect cash
   • OPERATIONAL
     • risk of losses resulting from inadequate or failed internal processes, people or system, or external events
     • risk of losing information from computer files
     • risk of staff mistakes
     • ineffective use of resources
   • COMPLIANCE
     • risks arising due to non-compliance with laws and regulations

3. Purpose of Internal Controls

   • 1. Preventitive
   • 2. Detective
   • 3. Corrective

4. Types (Turnbull Report)

   • 1. Financial Control
     • internal accounting controls to ensure that
     • - transactions are made with management authorisation
     • - transactions are recorded so that fin statements could be prepared
     • - transactions are recorded so that assets are accounted for
     • - access to assets is allowed with management authorisation
     • - accounting records for assets are compared with actual assets
     • ensure that
       • quality of internal and external financial reporting
       • no fraud is committed
       • financial assets of the company are not stoled
   • 2. Operational Control
     • help to reduce operational risks, prevent failures in operational procedures
     • machine breakdowns
     • human error
     • failures in IT systems
     • poor management
   • 3. Compliance Control
     • make sure that the entity complies with all the requirements of the relevant legislation and regulations

5. Elements (COSO+Turnbull Guidance)

   • 1. CONTROL ENVIRONMENT
     • corporate culture, management style and employee attitude to internal control procedures
   • 2. RISK IDENTIFICATION AND ASSESSMENT
     • systems or procedures for identifying the risks and assessing their significance
   • 3. INTERNAL CONTROLS
     • system devices and implemented to eliminate, reduce or control risks
   • 4. INFORMATION AND COMMUNICATION
     • system of information provision and communication within the organisation, so that individuals are aware of what is expected of them; existence and use of whistleblowing procedure
   • 5. MONITORING
     • effectiveness of internal controls should be monitored regularly; internal audit