1. Internal Control

2. Internal Control Definition
A process, effected by the entity’s board
of directors, management and other
personnel, designed to provide reasonable
assurance regarding the achievement of
objectives.

3. Internal Control Objectives
1. Reliability of financial reporting
2. Efficiency and effectiveness of operations
3. Compliance with laws and regulations

4. Five Components of Internal Control
Control Environment
Risk
assessment
Information and
communication
Control
activities
Monitoring

5. The Control Environment
Integrity and ethical values
Commitment to competence
Board of directors or audit
committee participation

6. The Control Environment
Management’s philosophy and operating style
Organizational structure
Human resource policies and practices

7. Risk Assessment Identify factors that may increase risk
Estimate the significance of the risk
Assess the likelihood of the risk occurring
Determine actions necessary to manage the risk

8. Control Activities 1. Adequate separation of duties
2. Proper authorization of transactions and activities
3. Adequate documents and records
4. Physical control over assets and records
5. Independent checks on performance

9. Adequate Separation of Duties
Custody of assets
from
Accounting
Authorization
of transactions
from
The custody of
related assets
Operational
responsibility
from
Record-keeping
responsibility
IT duties
from
User departments

10. Proper Authorization of Transactions and Activities
General authorization
Specific authorization

11. Adequate Documents and Records
Prenumbered consecutively
Prepared at the time of transaction
Designed for multiple use
Constructed to encourage correct preparation

12. Physical Control Over Assets and Records
The most important type of protective
measure for safeguarding assets and
records is the use of physical precautions.

13. Independent Checks on Performance
The need for independent checks arises
because internal control tends to change
over time unless there is a mechanism
for frequent review.

14. Information and Communication
The purpose of an accounting information
and communication system is to…
initiate, record, process, and report
the entity’s transactions and to maintain
accountability for the related assets.

15. Monitoring Monitoring activities deal with management’s
ongoing and periodic assessment of the
quality of internal control performance…
to determine whether controls are operating
as intended and modified when needed.

16. Methods Used to Document Understanding
Narrative
Flowchart
Internal
control
questionnaire

17. Evaluating Internal Control Operation
Update and evaluate auditor’s previous
experience with the entity
Make inquiries of client personnel
Examine documents and records
Observe entity activities and operations
Perform walk-throughs of the accounting system

18. Evaluating Significant Control Deficiencies
SIGNIFICANCE
Material
Material
Weakness
LIKELIHOOD
Remote
Probable
Immaterial

19. Identify Deficiencies and Weakness
Identify existing controls
Identify the absence of key controls
Consider the possibility of compensating controls
Decide whether there is a significant deficiency
or material weakness
Determine potential misstatements that could result

20. Communications Communications to those charged with governance
Internal audit reports

21. Tests of Controls The procedures to test effectiveness of controls
in support of a reduced assessed control
risk are called tests of controls.

22. End of Chapter