1. Chapter 9: Introduction to Internal Control Systems
1992 COSO Report
Updates on Risk Assessment
Examples of Control Activities
Update on Monitoring
2011 COBIT, Version 5
Types of Controls
Evaluating Controls

2. Internal Control Systems
Definition
Policies, plans, and procedures
Implemented to protect a firms assets
People Involved
Board of directors
Management
Other key personnel

3. Internal Control Systems
Provides reasonable assurance
Effectiveness and efficiency of operations
Reliability of financial reporting
Protection of Assets
Compliance with applicable laws and regulations
Important Guidance
Statement on Auditing Standard No. 94
Sarbanes-Oxley Act of 2002

4. Internal Control System Objectives
Safeguard assets
Check the accuracy and reliability of accounting data
Promote operational efficiency
Enforce prescribed managerial policies

5. Study Break #1
This term describes the policies, plans, and procedures implemented by a firm to protect the assets of the organization.
Internal control
SAS No. 94
Risk assessment
Monitoring

6. Study Break #1 - Answer
This term describes the policies, plans, and procedures implemented by a firm to protect the assets of the organization.
Internal control
SAS No. 94
Risk assessment
Monitoring

7. Study Break #2
Which of the following is not one of the four objectives of an internal control system?
Safeguard assets
Promote firm profitability
Promote operational efficiency
Encourage employees to follow managerial policies

8. Study Break #2 - Answer
Which of the following is not one of the four objectives of an internal control system?
Safeguard assets
Promote firm profitability
Promote operational efficiency
Encourage employees to follow managerial policies

9. Background Information on Internal Controls

10. Background Information on Internal Controls

11. Background Information on Internal Controls

12. 1992 COSO Report Defines internal control and components
Presents criteria to evaluate internal control systems
Provides guidance for public reporting on internal controls
Offers materials to evaluate an internal control system

13. Components of Internal Control – COSO 1992
Control Environment
Management’s oversight , integrity, and ethical principles
Attention and direction by board of directors
Management’s philosophy and operating style
Method of assigning authority and responsibility
Method of organizing and developing employees

14. Components of Internal Control – COSO 1992
Risk Assessment
Identify organizational risks
Analyze potential of risks (cost and occurrence)
Cost-benefit analysis
Control Activities
Policies and procedures
Manual and automated

15. Components of Internal Control – COSO 1992
Information and Communication
Inform employees
Roles and responsibilities
Importance of good working relationships
Monitoring
Evaluation of internal controls
Initiate corrective action when necessary

16. 2004 COSO Enterprise Risk Management Framework
Emphasizes enterprise risk management
Includes COSO (1992) control components
Three new components
Objective setting
Event identification
Risk response

17. 2004 COSO Enterprise Risk Management Framework

18. Components of Internal Control – COSO 2004
Objective Setting
Strategic – high level goals and mission
Operations – day-to-day efficiency, performance, and profitability
Reporting – internal and external
Compliance – laws and regulations

19. Components of Internal Control – COSO 2004
Event Identification and Risk Response
Identify threats
Analyze risks
Implement cost-effective countermeasures
Additional considerations
Risk tolerance
Cost-benefit trade-offs

20. Risk Assessment Worksheet

21. COSO’s 2010 Report on ERM
Commissioned survey called Enterprise Risk Management Initiative
Survey targeted utilization of COSO ERM Framework
Theoretically sound
65% fairly or very familiar with framework
Board had not assigned risk oversight in over half of organizations
State of ERM is relatively immature

22. Study Break #3
An internal control system should consist of five components. Which of the following is not one of those five components?
The control environment
Risk assessment
Monitoring
Performance evaluation

23. Study Break #3 - Answer
An internal control system should consist of five components. Which of the following is not one of those five components?
The control environment
Risk assessment
Monitoring
Performance evaluation

24. Study Break #4
Which of the following is not one of the three additional components that was added in the 2004 COSO Report?
Objective setting
Risk assessment
Event identification
Risk response

25. Study Break #4 - Answer
Which of the following is not one of the three additional components that was added in the 2004 COSO Report?
Objective setting
Risk assessment
Event identification
Risk response

26. Examples of Control Activities
Good Audit Trail
Sound Personnel Policies and Practices
Separation of Duties
Physical Protection of Assets
Reviews of Operating Performance

27. Good Audit Trail Use of Audit Trail Purpose of Audit Trail
Follow path of data recorded in transaction
Initial source documents to final disposition of data
Data on reports back to source documents
Purpose of Audit Trail
Verify accuracy of recorded transactions
Detect errors and irregularities

28. Sound Personnel Policies
Retain as is (except for bold) - Prathima

29. Separation of Duties Purpose Separate Related Activities
Structure of work assignments
One employee’s work checks the work of another
Separate Related Activities
Authorizing transactions
Recording transactions
Maintaining custody of assets

30. Physical Protection of Assets
Inventory Controls
Stored in safe location with limited access
Utilization of Receiving Report
Document Controls
Protecting valuable organizational documents
Corporate charter, major contracts, blank checks, and SEC registration statements

31. Receiving Report

32. Physical Protection of Assets
Cash Control
Most susceptible to theft and human error
Fidelity bond coverage
Use checks for cash disbursements
Deposit the daily cash receipts intact

33. Disbursement Voucher

34. Reviews of Operating Performance
Internal Audit Function
Reports to Audit Committee of Board of Directors
Independent of other subsystems
Enhances objectivity
Duties of Internal Auditors
Operational audits
Regular reviews of internal control systems

35. Study Break #5
Separation of duties is an important control activity. If possible, managers should assign which of the following three functions to different employees?
Analysis, authorizing, transactions
Custody, monitoring, detecting
Recording, authorizing, custody
Analysis, recording, transactions

36. Study Break #5 - Answer
Separation of duties is an important control activity. If possible, managers should assign which of the following three functions to different employees?
Analysis, authorizing, transactions
Custody, monitoring, detecting
Recording, authorizing, custody
Analysis, recording, transactions

37. Update on Monitoring
2009 COSO Monitoring Guidance Report

38. 2011 COBIT, Version 5
Control Objectives for Information and related Technology (COBIT)
Strategic alignment
Realization of expected benefits of IT
Continual assessment of IT investment
Determine risk appetite
Measure and assess performance of IT resources

39. COBIT and Val IT Integration

40. Types of Controls Preventive Controls Detective Controls
Prevent problems from occurring
Detective Controls
Alert managers when preventive controls fail
Corrective controls
Solve or correct a problem

41. Evaluating Controls Requirements of Sarbanes-Oxley Act
Statement of management responsibility for internal control structure
Assessment of effectiveness of internal control structure
Attestation of auditor on accuracy of management’s assessment

42. Cost-Benefit Analysis

43. A Risk Matrix

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45. Chapter 9