Presentation on theme: "Internal Control. 10 - 2 Internal Control Definition A process, effected by the entity’s board of directors, management and other personnel, designed."— Presentation transcript:
10 - 2 Internal Control Definition A process, effected by the entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives.
10 - 3 3. Compliance with laws and regulations 2. Efficiency and effectiveness of operations 1. Reliability of financial reporting Internal Control Objectives
10 - 4 Five Components of Internal Control Risk assessment Control activities Information and communication Monitoring
10 - 5 The Control Environment Integrity and ethical values Commitment to competence Board of directors or audit committee participation
10 - 6 The Control Environment Management’s philosophy and operating style Organizational structure Human resource policies and practices
10 - 7 Risk Assessment Identify factors that may increase risk Assess the likelihood of the risk occurring Determine actions necessary to manage the risk Estimate the significance of the risk
10 - 8 Control Activities 1. Adequate separation of duties 2. Proper authorization of transactions and activities 3. Adequate documents and records 4. Physical control over assets and records 5. Independent checks on performance
10 - 9 Adequate Separation of Duties Custody of assetsAccounting Authorization of transactions The custody of related assets Operational responsibility Record-keeping responsibility IT dutiesUser departments from
10 - 10 Proper Authorization of Transactions and Activities General authorization Specific authorization
10 - 11 Adequate Documents and Records Prenumbered consecutively Prepared at the time of transaction Designed for multiple use Constructed to encourage correct preparation
10 - 12 Physical Control Over Assets and Records The most important type of protective measure for safeguarding assets and records is the use of physical precautions.
10 - 13 Independent Checks on Performance The need for independent checks arises because internal control tends to change over time unless there is a mechanism for frequent review.
10 - 14 Information and Communication The purpose of an accounting information and communication system is to… initiate, record, process, and report the entity’s transactions and to maintain accountability for the related assets.
10 - 15 Monitoring Monitoring activities deal with management’s ongoing and periodic assessment of the quality of internal control performance… to determine whether controls are operating as intended and modified when needed.
10 - 16 Methods Used to Document Understanding Narrative Flowchart Internal control questionnaire
10 - 17 Evaluating Internal Control Operation Update and evaluate auditor’s previous experience with the entity Make inquiries of client personnel Examine documents and records Observe entity activities and operations Perform walk-throughs of the accounting system
10 - 18 Evaluating Significant Control Deficiencies Material Weakness LIKELIHOOD SIGNIFICANCE Material Immaterial ProbableRemote
10 - 19 Identify Deficiencies and Weakness Identify existing controls Identify the absence of key controls Consider the possibility of compensating controls Decide whether there is a significant deficiency or material weakness Determine potential misstatements that could result
10 - 20 Communications Internal audit reports Communications to those charged with governance
10 - 21 Tests of Controls The procedures to test effectiveness of controls in support of a reduced assessed control risk are called tests of controls.