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6 views25 pages

Lec 2

Uploaded by

202101466
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Faculty of Financial & Administrative Sciences

Lecture: 2

Dr. Elsayed Abdelall

Faculty of commerce- Alex University


Internal Control Basics

2
Connect

What are you trying


Objectives
to achieve?

What might thwart


Risks
our efforts?

How can we manage


Controls
risk?

3
Internal Control

INTERNAL CONTROL is a process, effected by an entity’s board of directors,


management, and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives relating to:

• Effectiveness
Operations • Efficiency
• Safeguarding assets
• Reliability
Reporting • Timeliness
• Transparency

Compliance • With regulatory environment

Management has a fundamental responsibility to develop and


maintain effective internal control.

4
Identifying Key Controls

Risks of Weak Internal Controls

• Financial misstatements
• Business loss
• Loss of funds or materials
• Incorrect or untimely management
information
• Fraud or collusion
• Tarnished reputation with the public
• Missed goals

5
Limitations of Internal Control

Even an effective system of internal control can experience a failure.


Limitations may result from:

• Reality that human judgment in decision making can be faulty and subject
to bias
• Breakdowns that can occur because of human failures such as simple errors
• Ability of management to override internal control
• External events beyond the organization control

Again, internal control provides reasonable, not absolute, assurance of achieving


objectives.

6
COSO Framework
stands for the Committee of Sponsoring
Organizations of the Treadway Commission
What are the five integrated components of internal control?

7
Components of Internal Control System

The control environment


is the basis of other elements of all other
components of the internal control system.
Moral values, managerial skills, the
honesty of employees and managerial
direction, etc. are included in the
controlling environment

8
Components of Internal Control System

Risk assessment
After setting up the objective of
business, external and internal risks
are to be assessed. The management
determines risk controlling means
after examining the risks related to
every objective.

9
Components of Internal Control System

Control activities
The management establishes a
controlling activities system to prevent
risk associated with every objective.
These controlling activities include all
those measures that are to be followed
by the employees

10
Components of Internal Control System

Information and communication


Relevant information for taking decision are to be
collected and reported in proper time. The events that
yield data may originate from internal or external
sources.
Communication is very important for achieving
management goals. The employees are to realize what
is expected of them and how their responsibilities are
related to the activities of others. Communication of the
owners with outside parties’ like’s suppliers is also very
important

11
Components of Internal Control System

•Monitoring
•When the internal control
system is in practice, the
organization monitors its
effectiveness so that necessary
changes can be brought if any
serious problem arises
12
Control Environment

Risk Assessment

Control Activities

Information & Communication

Monitoring
1- Control Environment
To have a health control environment, the
following Requirements should be satisfied :

❑ Managers should encourage control activities


Accordingly subordinates will follow control rules

❑ Existence The code of ethics that represent


a list of desired actions & related motivation
Also a list of undesired actions & related
Punishment.
❑ Controllers
-Prefer That : Mangers Take Low Risk Decisions
Bec. Low Risk Results Are Relatively Easy To Control
That Implies Controllers Are Risk Averse,
❑ Managers
- On The Other Hand Mangers Are Motivated To Take
High Risk Decisions For Profit Maximization Purpose
this Implies that Managers Are Risk Takers ,
Since Both Managers & Controllers Are Cooperating
Together .
We Should Reach A Compromise Of Conflicting
Risk Attitudes
Case 1
The sales manger of sonic company has to select
a market strategy and the related Information is presented
below to alternate strategies in terms of the possible returns
and related probabilities:

Returns Prob
Strategy1 2000 30%
4000 40%
6000 30%
Strategy2 6000 40%
12000 50%
2000 10%
Required:
1) As a manger, select the best strategy
2) As a controller, select the best strategy
Solution
1) as a manger who is a risk taker, the decision
role is profit maximization to select the option
that maximize profit
so, we should calculate the expected value of the
return under each option then selecting the
higher expected value :
expected value = the total of possible Return * related Prob
this accordingly the expected return
1st Strategy = 2000*30%+4000*40%+6000*30%
=4000

2nd Strategy = 6000*40%+12000*50%+2000*10%


= 8600 √

Returns Prob
Strategy1 2000 30%
4000 40%
6000 30%
Strategy2 6000 40%
12000 50%
2000 10%
Returns Prob n=1 × 2
Strategy1 2000 30% 600
4000 40% 1600
6000 30% 1800
Strategy2 6000 40% 2400
12000 50% 6000
2000 10% 200
Control Environment

Risk Assessment

Control Activities

Information & Communication

Monitoring
Assignment (2)
The sales manger of Toshiba company has to select
Between two market strategies and the related Information
is presented below to alternate strategies in terms of
the possible returns and related probabilities:

Returns Prob
Strategy1 2500 25%
6000 35%
7000 40%
Strategy2 3000 15%
9000 28%
2000 57%
Required:
1) As a manger, select the best strategy
2) As a controller, select the best strategy

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