2008 Financial Management Institute of Canada – Manitoba Chapter Professional Development Day Presented by: David R. Hancox, CIA, CGFM Co-Author: Government Performance Audit in Action Faculty: Siena College and USDA Graduate School, Washington DC Director of Audits: NYS Comptroller’s Office Management's Responsibility for Internal Controls Does anyone get it?

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 2 Five Components Control Environment Risk Assessment Control Activities Information & Communication Monitoring

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 3 Scrap Your Thinking About Control Controls over people aggravate them The more you control someone – the more they rebel Strong Controls – But the Wrong Controls

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 4 Control Environment Characteristic of people who have the skill, knowledge, ability and tools to perform a task –Management must ensure that staff possess the knowledge, skills, and ability necessary to do their jobs –Management must ensure that staff have what they need – such as equipment, software and policy and procedure manuals Competence

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 5 Control Environment Management should reflect a commitment to: –Establishing levels of knowledge and skill required for every position –Verifying the qualifications of job candidates –Hiring and promoting only those with the required knowledge and skills –Establishing training programs that help employees increase their knowledge and skills Competence

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 6 Control Environment The attitude people have about their work, as exhibited by their confidence, their discipline, enthusiasm and their willingness to perform tasks Morale

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 7 Control Environment Management is responsible to maintain good Morale –Staff should have a sense that: Their opinions and contributions are welcomed, valued and recognized The organization is willing to help improve their level of competency There is opportunity for continuous improvement They have a stake in the mission, goals and objective of the organization The lines of communication are open Morale

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 8 Control Environment Executive management should set a tone that emphasizes the importance of internal controls, including: –Ongoing education to ensure everyone understands the internal control system and their role in it –An openness to control self evaluations and internal and external audits of controls –Responsiveness to issues raised as the result of the evaluations and audits –Minimal and guarded use of control overrides Supportive Attitude

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 9 Components of Internal Controls Risks are events that threaten the accomplishment of objectives There are both internal and external risks Examples of risks include: –Human error –Fraud –System breakdowns –Natural disasters Assessing and Managing Risk

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 10 Assessing and Managing Risk Identify each risk in terms of: –Likelihood –Significance or impact –Cause You don’t know, what you don’t know! Risk Assessment Process

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 11 Risk Assessment Process The probability that an unfavorable event would occur if there were no internal controls or limited internal controls Likelihood

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 12 Risk Assessment Process A measure of the magnitude of the effect on an organization if the unfavorable event were to occur –Inherent Risk Innate to the program, function or activity Evaluated by the ultimate harm that may be done or the opportunity that may be lost Significance or Impact

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 13 Risk Assessment Process The Reason why an unfavorable event may occur Cause

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 14 LIKELIHOODLIKELIHOOD High Low High Impact Judgment Required

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 15 Risk Assessment Process How to manage risk How to prevent or reduce risk How to schedule the frequency of internal control system evaluations How to manage risk during change Risk Assessment Considerations

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 16 Risk Assessment Process Accept the risk: Do not establish control activities Prevent or reduce the risk: Establish control activities Avoid the risk: Do not carry out the function Managing Risk

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 17 Risk Assessment Process What is the cause of the risk? What is the cost of control vs. the cost of the unfavorable event? What is the priority of this risk? Preventing or Reducing Risk

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 18 Risk Assessment Process New processes New systems Changes in job responsibilities Reorganizations Changes in personnel Managing Risk During Change

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 19 Control Activities The cost of the control activity should not exceed the cost incurred if the undesirable event occurred Build control activities into business processes and systems as the processes and systems are being designed The distribution of resources among the control activities should be based on the significance and likelihood of the risk it is preventing or reducing Control Activity Considerations

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 20 Control Activities Preventive –Approvals, authorizations Detective –Reconciliation’s, audits Categories

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 21 Diminishing Control Activities Documentation Approval and Authorization Separation of Duties – in many cases Commonly Used Control Activities

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 22 Important Control Activities Verification Supervision Safeguarding Assets Reporting

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 23 The glue that holds it all together Information & Communication –Communication channels in many organizations flow top down. What’s the top know?

AGA - Mid-Missouri PDC David R. Hancox CIA CGFM 24 Monitoring Should exist at all levels –Staff should be able to monitor their own work –Management should monitor operations and results –Internal auditors bring accountability