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Unit 6 Internal Control

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14 views12 pages

Unit 6 Internal Control

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UNIT - 06

Internal Control System

Dr. Muthu Gopalakrishnan. M


Associate Professor
School of Business and Management
CHRIST Deemed to be University
Bangalore Bannerghatta Road Campus
Bengaluru
Components of Internal Control
1. Control Environment
2. Entity’s Risk Assessment Process
For Financial Reporting Purposes Entity’s Risk
Assessment process includes;
–Identification of Business Risk relevant to the
preparation of financial statement with reference to
applicable financial reporting framework, estimation of
their significance likelihood of their re-occurence
–Risk relevant to external & internal events, transactions
or processes affecting entity’s ability to initiate, record,
process and report financial data
3. Control Activities
4. Information System
• An information system consists of infrastructure (physical and hardware
components), software, people, procedures, and data. Many information systems
make extensive use of information technology (IT).
• The quality of system-generated information affects management’s ability to
make appropriate decisions in managing and controlling the entity’s activities
and to prepare reliable financial reports.
• The information system relevant to financial reporting objectives, which includes
the financial reporting system, encompasses methods and records that:
• Identify and record all valid transactions
• Describe on a timely basis the transactions in sufficient detail to permit proper
classification of transactions for financial reporting.
• Measure the value of transactions in a manner that permits recording their proper
monetary value in the financial statements.
• Determine the time period in which transactions occurred to permit recording of
transactions in the proper accounting period.
• Present properly the transactions and related disclosures in the financial
statements
5. Monitoring Of Controls

Monitoring activities may include using


information from communications from external
parties that may indicate problems or highlight
areas in need of improvement. Customers
implicitly corroborate billing data by paying
their invoices or complaining about their
charges. In addition, regulators may
communicate with the entity concerning
matters that affect the functioning of internal
control,
Five Key Internal Control Activities…
1. Separation of Duties
– Divide responsibilities between different employees so one
individual doesn’t control all aspects of a transaction.
– Reduce the opportunity for an employee to commit and conceal
errors (intentional or unintentional) or perpetrate fraud.
2. Documentation
Document & preserve evidence to substantiate:
– Critical decisions and significant events...typically involving the
use, commitment, or transfer of resources.
– Transactions…enables a transaction to be traced from its
inception to completion.
– Policies & Procedures…documents which set forth the
fundamental principles and methods that employees rely on to do
their jobs.
3. Authorization & Approvals
– Management documents and communicates which activities
require approval, and by whom, based on the level of risk to
the organization.
– Ensure that transactions are approved and executed only by
employees acting within the scope of their authority granted
by management.
4. Security of Assets
– Secure and restrict access to equipment, cash, inventory,
confidential information, etc. to reduce the risk of loss or
unauthorized use.
– Perform periodic physical inventories to verify existence,
quantities, location, condition, and utilization.
– Base the level of security on the vulnerability of items
being secured, the likelihood of loss, and the potential
impact should a loss occur.
5. Reconciliation & Review
– Examine transactions, information, and events to verify
accuracy, completeness, appropriateness, and
compliance.
– Base level of review on materiality, risk, and overall
importance to organization’s objectives.
– Ensure frequency is adequate enough to detect and act
upon questionable activities in a timely manner.
Corporate Governance and Internal Control over
Financial Reporting: A Comparison of Regulatory
Regimes:
• The term “Internal Financial Controls” means “the policies and
procedures adopted by the company for ensuring the orderly and
efficient conduct of its business, including adherence to company’s
policies,
i. the safeguarding of its assets,
ii. the prevention and detection of frauds and errors,
iii. the accuracy and completeness of the accounting records,
iv. and the timely preparation of reliable financial information”
------ Companies Act 2013

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