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    Internal Control & Review

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    Pikiniso
    The document discusses internal management control systems and internal audit in corporate governance. It defines internal control and explains the importance of internal control and risk management in corporate governance. It describes the objectives of internal control systems, including safeguarding assets and achieving objectives. It also discusses the roles and responsibilities of management and employees in internal control systems. The document then discusses internal audit, defining it as an independent appraisal activity. It explains the functions of internal audit including reviewing accounting systems, risk identification, and compliance. It emphasizes the importance of auditor independence and identifies threats to independence. Finally, it describes the role of the audit committee in overseeing internal audit, internal controls, and relationships with external auditors.

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    Attribution Non-Commercial (BY-NC)
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    Internal Control & Review

    Uploaded by

    Pikiniso
    259 views32 pages
    The document discusses internal management control systems and internal audit in corporate governance. It defines internal control and explains the importance of internal control and risk management in corporate governance. It describes the objectives of internal control systems, including safeguarding assets and achieving objectives. It also discusses the roles and responsibilities of management and employees in internal control systems. The document then discusses internal audit, defining it as an independent appraisal activity. It explains the functions of internal audit including reviewing accounting systems, risk identification, and compliance. It emphasizes the importance of auditor independence and identifies threats to independence. Finally, it describes the role of the audit committee in overseeing internal audit, internal controls, and relationships with external auditors.

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    Internal audit

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    The document discusses internal management control systems and internal audit in corporate governance. It defines internal control and explains the importance of internal control and risk management in corporate governance. It describes the objectives of internal control systems, including safeguarding assets and achieving objectives. It also discusses the roles and responsibilities of management and employees in internal control systems. The document then discusses internal audit, defining it as an independent appraisal activity. It explains the functions of internal audit including reviewing accounting systems, risk identification, and compliance. It emphasizes the importance of auditor independence and identifies threats to independence. Finally, it describes the role of the audit committee in overseeing internal audit, internal controls, and relationships with external auditors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    259 views32 pages

    Internal Control & Review

    Uploaded by

    Pikiniso
    The document discusses internal management control systems and internal audit in corporate governance. It defines internal control and explains the importance of internal control and risk management in corporate governance. It describes the objectives of internal control systems, including safeguarding assets and achieving objectives. It also discusses the roles and responsibilities of management and employees in internal control systems. The document then discusses internal audit, defining it as an independent appraisal activity. It explains the functions of internal audit including reviewing accounting systems, risk identification, and compliance. It emphasizes the importance of auditor independence and identifies threats to independence. Finally, it describes the role of the audit committee in overseeing internal audit, internal controls, and relationships with external auditors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 32

    4

    Management control systems in corporate governance

    Objectives/learning outcomes

    Define and explain internal management control [2] Explain and explore the importance of internal control and risk management in CG [3] Describe objectives of ICS [2] Identify, explain and evaluate the CG and executive management roles in risk management [3] Identify and assess the importance of the components of ICS Explore and evaluate the effectiveness of ICS [3] Describe and assess the need to report on ICS to shareholders [3]
    2

    Internal management control

    Control means:

    Ensuring what the organisation intends to happen happens Happens in the way it's supposed to happen Happens when it's supposed to happen.

    Internal control magt action to manage risks & ensure objectives are met
    3

    Internal control system definition


    Control Environmen t
    Magt style, attitudes to ICs Corporate culture and values of employees

    Comprises
    Control Procedures

    Necessary for ICs Policies & procedures to achieve objectives

    Objectives of internal control systems


    Safeguard assets

    Achievement of objectives
    Reliable financial & magt reports

    Objectives
    Risk management

    Compliance with laws & regulations


    5

    ICS and risk management


    ICS should be designed to counter the risks Factors to consider in setting up an ICS:

    The nature and extent of risks facing the company Acceptable and unacceptable risks The likelihood of the risks concerned materialising Companys ability to reduce the incidence and impact on the business of risks that do materialise The costs and benefits of operating particular controls
    6

    Key features of a sound system of internal controls - Turnbull


    Quick response to environmental change
    Embedded in operations & systems

    Characteristics
    Immediate reporting of weaknesses
    7

    Components of an internal control system COSO model


    Information & communication e.g. of risks, weaknesses

    Control policies & procedures specific actions (ACCAMAPS)

    Elements

    Risk assessment controllable & uncontrollable risks

    Monitoring of controls e.g. by internal audit

    Control environment
    8

    Control procedures (ACCAMAPS)


    Authorisation (e.g. of purchases and stock issues) Computer controls (e.g. passwords, range checks) Comparison controls (e.g. stock records with actual stocks) Accounting recons (e.g. bank & supplier recon) Maintain TB and control accounts (e.g. debtors control) Accuracy or arithmetic controls (e.g. re-computation) Physical controls (e.g. limiting access to computers) Segregation of duties (between ordering, custody of stock and authorising payments)
    9

    Executive magt role in ICS


    Responsibility Board Snr executive magt Business unit heads Role Ensure adequacy & effectiveness of ICS Set IC policy; monitor ICS Establish specific IC policies & procedures

    Employees

    Operate & adhere to ICs


    ICS are everyones business

    10

    Limitations/weaknesses of internal control systems


    Human error Magt overriding controls Collusion to circumvent controls Failure to deal with new & un-usual situations Internal control systems can only provide reasonable (not absolute) assurance
    11

    Reporting on internal controls to shareholders

    Board should review effectiveness of internal controls & report to shareholders Benefits of reporting:

    Increased shareholder satisfaction Audit committee forced to consider their work seriously Company open to additional scrutiny 12 Fulfills CG requirements

    Conclusion ICS

    Main points

    Importance of control environment to ICS effectiveness ICS should be sound Effective ICS reduces risk, improves CG ICS is not fool proof, has weaknesses ICS are everyones business

    13

    Internal audit (IA) in corporate governance

    14

    Objectives/learning outcomes

    Describe the function and importance of internal audit [1] Explain, and discuss the importance of, auditor independence in all client audit situations (including internal audit) [3] Explain, and assess the nature and sources of risks, to auditor independence [3]. Explain and evaluate the importance of compliance and the role of the internal audit committee in internal control [3] Explain and explore the importance and characteristics of, the audit committees relationship with external auditors [2] Describe and analyse the work of the internal audit committee in overseeing the internal audit function [2]
    15

    Internal audit - definition

    Independent appraisal activity within an entity as a service to it Control over other controls Improves CG by strengthening internal control
    16

    Types of audits

    Transaction audits audit of individual transactions Systems audits audit of internal controls within a system e.g.:

    Design of internal controls Operation of internal controls

    Risk-based audits concentrates audit effort (staff & time) on risky areas of business
    17

    Internal auditing a range of areas


    Audit of accounting systems Operational audits adequacy & effectiveness Value for money audits on 3 Es

    Management audits on magt and org structure


    Social & environmental audits
    18

    Organisational structure of internal audit

    Separate dept in large entities Responsibility of specific individuals in smaller entities May be outsourced to accounting firms

    Head IA

    Manager IT audits

    Manager Financial audits

    Manager Forensic audits

    19

    Need for IA function

    Contingent factors that determine the need for an internal audit function include: Complexity of operations Size of organisation Internal control systems problems Cost-benefit issues Unexplained or unacceptable events Changes in structures, processes, and systems
    20

    Functions/roles of IA

    Reviewing accounting & internal control systems Risk identification Carry out value for money audits (VFM) Reviewing compliance with laws Carry out special investigations e.g. into suspected frauds Examine financial & operating 21 information

    Threats to independence of IA
    Self interest

    Advocacy

    Threats

    Self review

    Intimidation

    Familiarity

    22

    Sources of threats to independence of IA


    Conflicts of interest resulting in lack of impartiality and bias (self interest) Reporting to executive management (intimidation) Interference in determining the scope of their work, performing the audit, and communicating results (intimidation, familiarity) Assessing specific operations for which they may have responsibility (self review/interest)
    23

    Factors to consider in measuring or improving effectiveness of IA Dept


    Professional proficiency Scope of work Performance of work (planning, supervision, review) Independence Authority Effective Management of dept

    24

    Internal v External Audit


    INTERNAL Appointed by & reports to Responsible for Required by Appointed by directors Internal controls mainly Companies articles EXTERNAL Shareholders, via AGM Both internal and external factors Statute Unlimited, determined by auditor
    25

    Scope of work Limited to Directors/ magtment instruction

    Internal audit reporting

    IA report has no prescribed format Contents may include:

    Objectives of audit work Summary of process undertaken Audit opinion Recommendations (should be practical, cost-effective & reduce risk to tolerable level)
    26

    Internal Audit Committee


    Sub-committee of board of directors
    To comprise at least 3 NEDs, one with financial knowledge Must have written terms of reference

    Must be provided with sufficient resources


    27

    The Role of Audit Committee

    Review financial & management reports & systems Liaise with external auditors Review of internal audit Review of internal control Review of risk management Review results of one-off investigations
    28

    Audit committee & internal audit


    Review annual work plan Monitor & assess effectiveness Role in overseeing IA function Ensure accountable to audit committee Appoint/dismiss IA head Check efficiency of IA e.g. plan Vs actual costs

    Help preserve independence


    Ensure recommendations are actioned

    29

    Audit committee & external auditors


    Recommend appointment Help preserve independence Role in overseeing external auditors Agree contract terms & perks

    Review scope of audit work

    Assess possible other services

    Carry out post completion review (errors, adjustments)


    30

    Audit committee & internal control


    Review internal financial controls
    Review auditors reports on ICs Role in IC delegated by board Review magt reports on ICs
    31

    Review risk magt systems

    Review statement on ICs

    Conclusion internal audit

    Main points

    Role of internal audit Enhancing effectiveness of IA Importance of auditor independence Threats to auditor independence Role of audit committee in IA Role of audit committee in ICS Role of audit committee in external audit
    32

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