Internal Control

Topics: Internal control, Control system, Receipt Pages: 16 (4919 words) Published: March 27, 2013
Internal Control Definition
Internal control is broadly defined as a process, effected by an entity's board of trustees, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: 1. Effectiveness and efficiency of operations

2. Reliability of financial reporting
3. Compliance with applicable laws and regulations
4. Safeguarding of assets

Internal control consists of five interrelated components:

* Control environment - The control environment includes the integrity, ethical values, and competence of the entity's people and is the foundation for all other components of internal control. * Risk assessment - Every entity faces risks that must be identified, analyzed, and managed to achieve its objectives. * Control activities - Control activities are the measures used to help ensure that management directives are carried out and that risks are addressed. They take many forms including policies and procedures, approvals, verifications, reconciliations, performance reviews, security measures, and segregation of duties. * Information and communication - Information systems must be in place to identify, capture, and communicate relevant information in a form and timeframe that enables people to carry out their responsibilities and maintain accountability for the entity's assets. * Monitoring - The entire internal control process must be monitored and the quality of its performance assessed as a part of regular management and supervisory activities. Corrective actions must be taken whenever the system does not perform as intended. Types of Internal Controls:

 1.  Detective:
Designed to detect errors or irregularities that may have occurred. 2.  Corrective:
Designed to correct errors or irregularities that have been detected. 3.  Preventive:
Designed to keep errors or irregularities from occurring in the first place. Limitations of Internal Controls:
No matter how well internal controls are designed, they can only provide reasonable assurance that objectives have been achieved.  Some limitations are inherent in all internal control systems.  These include: 1.  Judgment:

The effectiveness of controls will be limited by decisions made with human judgment under pressures to conduct business based on the information at hand. 2.  Breakdowns:
Even well designed internal controls can break down.  Employees sometimes misunderstand instructions or simply make mistakes.  Errors may also result from new technology and the complexity of computerized information systems. 3.  Management Override:

High level personnel may be able to override prescribed policies and procedures for personal gain or advantage.  This should not be confused with management intervention, which represents management actions to depart from prescribed policies and procedures for legitimate purposes. 4.  Collusion:

Control systems can be circumvented by employee collusion.  Individuals acting collectively can alter financial data or other management information in a manner that cannot be identified by control systems. Internal Control Objectives

Internal Control objectives are desired goals or conditions for a specific event cycle which, if achieved, minimize the potential that waste, loss, unauthorized use or misappropriation will occur.  * Authorization

The objective is to ensure that all transactions are approved by responsible personnel in accordance with specific or general authority before the transaction is recorded. * Completeness
The objective is to ensure that no valid transactions have been omitted from the accounting records. * Accuracy
The objective is to ensure that all valid transactions are accurate, consistent with the originating transaction data and information is recorded in a timely manner. * Validity
The objective is to ensure that all recorded transactions fairly represent the economic events that...
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