Governance, risk and ethics

2 Section A: Governance and responsibility Section B: Internal control and review Section C: Identifying and assessing risk Section D: Controlling risk Section E: Professional values and ethics Governance, risk and ethics

3 Section B: Internal control and review B1. Management control systems in corporate governance B2. Internal control, audit and compliance in corporate governance B3. Internal control and reporting B4. Management information in audit and internal control Designed to give you knowledge and application of:

4  Define and explain internal management control. [2]  Explain and explore the importance of internal control and risk management in corporate governance. [3]  Describe the objectives of internal control systems. [2]  Identify and assess the importance of the elements or components of internal control systems. [3] Study Guide B1: Management control systems in corporate governance Learning Outcome

5 Define and explain internal management control system of controls that give reasonable assurance relating to  effectiveness & efficiency of operations,  reliability of financial reporting &  organisational compliance with applicable laws & regulations Corporate planning & control processes Budgetary planning & control Management assurance element of internal audit Standard costing Internal management control (IMC) implies specific management controls within internal control Refer to Case Study on page 214 Continued…

6 Internal audit Is a management tool Provides assurance regarding design & operations of internal controls Involves thorough examination of Operations & records of organisation Continued…

7 Explain & explore importance of internal control & risk management in CG Organisation begins its strategic planning by setting long-term objectives Organisation identifies & analyses any potential risks it may incur in achieving these objectives Organisation implements an internal control system to manage these risks & also to:  Achieve effective & efficient operations  Produce timely & accurate financial reporting  Comply with all relevant laws & regulations Refer to example on page 218 Continued…

8 Risk management & internal controls According to combined code  Maintain a sound system of internal control  Adopt “comply / explain” approach US requirements- SOA Management has responsibility to set up & maintain internal controls Refer to Example on page 219 Continued…

9 Internal control efficiency & effectiveness of operation Timely, reliable & accurate financial reporting compliance with applicable laws & regulations  Adhering to all management policies  Safeguarding assets & shareholder value  ensure that information supports the compilation of FS that give true & fair view  support compliance with applicable laws and regulations Control environment Entity’s risk assessment process Information system & communication Control activities Monitoring of controls Refer to LO 5 on page 228 Continued…

10 Importance of elements / components of ICS Control environment Risk assessment Control activities Information & communication Monitoring Components of internal control system  Sets tone for organisation  Influences control consciousness of personnel  Foundation for all other components  Policies & procedures  Help ensure management directives are carried out  Help ensure necessary actions taken to address risks  Identification & analysis of risks to achievement of objectives  Relevant information must be identified, captured & communicated  Process which assesses quality of system over time Continued…

11 Control environment Human resource policies & practices Assignment of authority & responsibility Communication & enforcement of integrity & ethical values Management’s philosophy & operating style Organisational structure Participation by those charged with governance Commitment to competence Refer to the diagram on page 230 Continued…

12 Company Senior management (through its actions & policies) Authority, responsibility & accountability People in company Good control environment & control activities (Turnbull report)  Should have clear strategies to deal with significant risks  Culture & various policies, codes etc. need to support business objectives, risk management & internal control system  Must communicate its expectations of employees & their freedom to act  Should display commitment, competence, integrity & promote environment of trust  Need to be defined clearly  Must have knowledge, skills & tools to ensure achievement of objectives Continued…

13 Risk assessment process Identification of business risk Estimation of significance of risks Decision on action to manage them Assessment of likelihood of their occurrence Risk management Risk transfer Risk acceptance Risk reduction Risk avoidance Continued…

14 RECAP  Define and explain internal management control. [2]  Explain and explore the importance of internal control and risk management in corporate governance. [3]  Describe the objectives of internal control systems. [2]  Identify and assess the importance of the elements or components of internal control systems. [3]