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Lecture 7 - Internal Control

Lecture 7 - Internal Control
Course

Audit and Control System (ACS1)

8 Documents
Students shared 8 documents in this course
Academic year: 2022/2023
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Asia Pacific University of Technology and Innovation

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Internal Control

plays an important role in preventing and detecting fraud and protecting the organization's resources, both physical (e., machinery and property) and intangible (e., reputation or intellectual property such as trademarks).

Definition of Internal Control by COSO (Committee of Sponsoring Organizations of the Treadway Commission)

“A process, effected by entity’s board of directors that involved with governance, management and other personnel which provide reasonable assurance regarding the achievement of certain objectives.”

 The sponsoring organizations:  American Accounting Association (AAA)  American Institute of Certified Public Accountants (AICPA)  The Institute of Internal Auditors (IIA)  Financial Executives International (FEI)  Institute of Management Accountants (IMA)

Objectives of Internal Control

 Effectiveness and efficiency of operations (including operational and financial goals)  Reliability, transparent and timeliness of financial reporting  Compliance with applicable laws and regulations (comply with GAAP standard)  Prevention and detection of fraud and error  Completeness – All transactions are included  Classification – All transactions are classified into the proper account  Authorization – All transactions are properly authorized  Timeliness – All transactions are recorded on a timely basis  Validity – All transaction processed are valid  Valuation – All transaction are properly valued  Postings – All transactions are properly recorded in journals and properly posted in special and general journals

5 Components of Internal Control (CRIME)

 Control Environment  Policies and procedures set by the entity that shall be enforced to the entity’s working environment.  Are they good in controlling and managing their employees?  Overall attitude, awareness and actions of directors and management regarding the internal control system and its importance to the entity.  Sets the tone of an organization, influencing the control consciousness of its people.  Providing discipline and structure and developing people in the organization.  Factors affecting:

 Integrity and ethical values (honesty, legal and ethical act)  A commitment to competence  Participation of the board of directors or audit committee  Management’s philosophy and operating style  Organizational structure  Assignment of authority and responsibility  Human resources policies and practice

 Risk Assessment  Identify things that threaten the achievement of the entity’s objectives.  A process of the entity identifies, responses to or manages its business risk in achieving the entity’s objectives.  What could give rise to risk:  Changes in the operating environment;  New personnel  New or revamped information system  Rapid growth and business complexity  New technology change  New lines, products or activities  Corporate restructuring (merger and acquisition)  Foreign operations (expansion)  Accounting pronouncements (standards)

 Information and Communication  Management communicates with the internal and external users about the rules and regulations of the entity.  Ability of management to convey information needed to the organizations.  Ensuring both internal and external users have a clear understanding of the internal control of the entity and these controls must be taken seriously.

 Monitoring  Management oversees the functioning of the entire organization and identifies things that aren’t working and corrects those problems.  A process that assesses the quality of the system's performance over time.  To ensure the effectiveness and efficiency of the overall internal control system  To determine whether internal control operates/modifies as intended.  Ongoing evaluation and communication on any issue in timely manner for corrective action purposes.

 Existing Control Activities  Auditor tests the controls of the entity to make sure they were operating effectively over a period of time.  Example: segregation of duties (ensure no single person has multiple roles in an accounting process)  Control procedures relevant to audit are:  Performance review and Independent review

 Inspection and review of documents.

 Inquiries about and observation of internal controls.

 Interview relevant personnel. (walkthrough test etc.)

 Assessment on internal auditor’s report

 Communication with top management

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Lecture 7 - Internal Control

Course: Audit and Control System (ACS1)

8 Documents
Students shared 8 documents in this course

University: Asia Pacific University of Technology and Innovation

Was this document helpful?
Internal Control
plays an important role in preventing and detecting fraud and protecting the organization's
resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or
intellectual property such as trademarks).
Definition of Internal Control by COSO (Committee of Sponsoring Organizations of the
Treadway Commission)
“A process, effected by entity’s board of directors that involved with governance,
management and other personnel which provide reasonable assurance regarding the
achievement of certain objectives.”
The sponsoring organizations:
American Accounting Association (AAA)
American Institute of Certified Public Accountants (AICPA)
The Institute of Internal Auditors (IIA)
Financial Executives International (FEI)
Institute of Management Accountants (IMA)
Objectives of Internal Control
Effectiveness and efficiency of operations (including operational and financial goals)
Reliability, transparent and timeliness of financial reporting
Compliance with applicable laws and regulations (comply with GAAP standard)
Prevention and detection of fraud and error
Completeness – All transactions are included
Classification – All transactions are classified
into the proper account
Authorization – All transactions are properly
authorized
Timeliness – All transactions are recorded on
a timely basis
Validity – All transaction processed are valid
Valuation – All transaction are properly valued
Postings – All transactions are properly recorded
in journals and properly posted in special and general journals
5 Components of Internal Control (CRIME)
Control Environment
Policies and procedures set by the entity that shall be enforced to the entity’s working
environment.
Are they good in controlling and managing their employees?
Overall attitude, awareness and actions of directors and management regarding the
internal control system and its importance to the entity.
Sets the tone of an organization, influencing the control consciousness of its people.
Providing discipline and structure and developing people in the organization.
Factors affecting:

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