Corporate Internal Control

• Corporate Internal Control

Evaluation Criteria

• Cognitive: 50%
• Formative: 25%
• Summative: 25%
• Attendance 80%

Fundamentals of Internal Control

• Internal control consists of the principles, fundamentals, rules, actions, mechanisms, instruments, and procedures of an organization.
• It involves a continuous series of actions through an entity's operation.
• Process control in a company maintains revision in planning, organization, direction, and control with the goal of determining efficiency and efficacy.

Auditor Responsibility

• Internal/External Auditor
• Internal auditing is an independent evaluation to examine and assess activities as a service to the organization.
• Its objective is to support company members in their performance by providing analysis, evaluations, recommendations, advice, and information.
• Internal auditing evaluates planning, organization, and administration processes.
• Evaluations focus on the reliability/integrity of financial and operative information, the efficacy/efficiency of operations, asset protection, and compliance with laws, regulations, and contracts.
• An internal auditor is a licensed accountant within the organization.
• Their function is to review company operations to issue a report on effective operations.
• Internal auditor work implies responsibility for providing confidence in decision-making to hierarchical levels in the organization.
• An external auditor examines the financial information of an entity.
• They are considered an independent and trusted technician in order to provide an opinion on the soundness of the revised information.
• Being independent brings credibility to the content of the examined financial statements.
• External auditing is an examination of the financial statements of an entity conducted by an independent accountant
• It aims to provide an opinion on whether the statements present a fair view of the financial situation, operational results, equity variations, with accounting standards.
• The auditor's duty is to offer their independent professional opinion of the financial statements fairly represent the financial conditions of the company

Study and Evaluation of Internal Control

• Internal control is a process by the direction and personnel of an entity designed to supply a degree of security in achieving goals in: effective operations, reliable financial information, and legal compliance.
• Internal control contributes to accounting system security by establishing/evaluating administrative, accounting, and financial procedures aiding the company.
• It detects irregularities and errors and proposes feasible solutions, evaluating levels of authority, personnel administration, and accounting methods, aiding the auditor to provide a transparent account of transactions and business practices.

Objectives of Internal Controls

• These can be categorized as: basic and general

Basic Objectives for Internal Controls

• Ensure adherence to prescribed policies by administration
• Promote efficiency
• Ensure reasonableness, reliability, opportunity, and integrity of financial, administrative, and operational information
• Protect the entity’s assets

General Objectives for Internal Controls

• System accounting objectives
• Authorization objectives
• Transaction processing and classification objectives
• Physical safeguard objectives
• Verification and evaluation objectives

System Accounting Objectives

• To be helpful and reliable, accounting systems should identify and record valid transactions, describe transactions in necessary detail for classification, quantify transaction value in units, record transactions in correct periods, and properly present transactions in financial statements.

Authorization Objectives

• All operations must be authorized either generally or specifically
• Authorizations should align with administrative criteria
• Transactions must be valid.
• Only transactions meeting administrative requirements should be processed.
• The result must be timely and supported by appropriate files.

Transaction Processing and Classification Objectives

• Operations must be recorded to prepare financial statements in accordance with financial information standards.
• Records must be maintained for assets in custody.
• Transactions must be classified to enable fair financial statement preparations.
• Transactions should be registered in the accounting period, especially those affecting multiple cycles.
• When there are links between periods, it should be fully identified

Physical Safeguard objectives

• Asset access should be permitted according to administrative policies, with full respect for due authorization.

Verification and Evaluation objectives

• Recorded data of assets in custody should be compared with existing physical assets at reasonable intervals.
• Appropriate and timely steps are to be taken regarding identified differences
• There must be controls to verify and evaluate balances reported in financial statements.

Scope of Internal Controls.

• All internal control systems include limitations
• Errors may occur when applying controls due to poor instruction or human error.
• Limitations include focus on routine transactions.
• Human error from distraction or poor instructions
• Circumventing controls through collusion internally/externally
• Abuse of power by someone responsible for an internal control.
• Procedures can become inadequate as conditions change.

Structure of Internal Control (COSO Model)

• According to the COSO model, a system has five interrelated elements: monitoring, control activities, information and communication, risk assessment, and control environment.
• These elements are integrated into the administration process

Control Elements

• These components apply to all entities, but implementing between small and big business differ.
• Smaller organizations may find less formal and less structured control effective.

Control Environment

• The basic component of the organization, that supports other control elements.
• It brings discipline, structure, and attitude to all members.
• Key factors that integrate include: control awareness and style, integrity and ethical values, participation of direction, organizational structure, delegation of authority and responsibility, and policies on human resources.
• Leadership directs/controls operations and establishes policies and procedures determined by integrity, motivation, competence, and capacity.
• Ethics and values affect the design, administration and supervision of vital processes.

Risk Evaluation

• Risks impact the capacity of an entity to achieve goals by internal/external events or circumstances.
• All entities face risk regardless of organizational size or nature.
• Risks can arise through external/internal changes, technological obsolescence, new products, or restructuring.
• Management considers importance, probability, and handling, also establishes plans, programs, or activities that mitigate risks.
• The intent is to pinpoint, dissect, and supervise risks that hinder an entity’s goals and can threaten the operation’s continuity

Information and Communication

• This involves the capture and interchange of crucial information for an entities operations.
• Quality of information and communication influences timely decisions and reliable reporting.
• This includes: direction of reports necessary for the enterprise, a report for the system information generated to transmit opportunity to add sufficient detail, control to secure participation, control access to authorized users, and a disaster recovery plan.
• Effective systems of financial reporting must: identify and record all transactions, describe operations accurately for classification, quantify operation values ​​in terms, and present the data appropriately in financial statements.
• Communication is achieved through manuals, policies, procedures, memorandums, and messages.
• A system needs controls that guarantee communication to employees, channels of communication for irregularities, and responsiveness by way of business ethics.

Control Activities

• Policies and procedures created by the administration to prevent and detect risks and objectives in the development and registration processes.
• Its goal is to investigate unexpected/extraordinary results and authorize remedial action if necessary.
• Controls can be broken down into preventive measures or detective measures.
• Preventative are constructed to avoid errors in the development of a process.
• Detective serves to detect and correct errors.
• The effectiveness should limit the degree of risk, possible errors, or irregularities that affect data.
• Implemented controls should ensure the reliability of accounting information by meeting 7 objectives.
• All operations are accounted for, all operations are real, all operations are valued in accordance with proper accounting practices, all operations are recorded in the correct period, all operations are classified correctly, all operations are summarized correctly, and all operation transfers are correct.
• It is crucial that the controls can create segregation of duties; to ensure the function of no employee can induce fraud or mistakes. Segregation of duties should occur with functions of: authorization of transactions, asset custody, transaction registry, and control procedures.
• Authorizations shall comply with established criteria. There shall also be measures to ensure only authorized parties may access assets.
• To keep consistent verification, there must be frequent verification/evaluations, recorded data can be compared to physical assets, and review of EEFF, reports, and etc.

Vigilance

• Oversight is the administration’s process to assess the quality of Internal Control over time, thus assessing the operations of control and course correct if necessary.
• Evaluations may be continuous, through regular direction/supervision, or separated during audit.