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Chapter 5 1

The document outlines the importance of the control environment in organizations, emphasizing its role in establishing a foundation for internal controls through factors like integrity, leadership, and policies. It details various control principles and activities, including transaction authorization, separation of duties, and independent verification, aimed at ensuring effective management and safeguarding assets. Additionally, it categorizes internal controls into five types: preventive, detective, corrective, directive, and compensating, each serving distinct functions in maintaining organizational integrity.

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7 views14 pages

Chapter 5 1

The document outlines the importance of the control environment in organizations, emphasizing its role in establishing a foundation for internal controls through factors like integrity, leadership, and policies. It details various control principles and activities, including transaction authorization, separation of duties, and independent verification, aimed at ensuring effective management and safeguarding assets. Additionally, it categorizes internal controls into five types: preventive, detective, corrective, directive, and compensating, each serving distinct functions in maintaining organizational integrity.

Uploaded by

Getnet
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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I.

control environment

• The control environment sets the tone of


the organization, influencing the control
consciousness of its people.
• Leaders of each department, area or
activity establish a local control
environment.
• It is the foundation for all other components
of internal control, providing discipline and
structure.
…control environment.

• Control environment factors include:

• Integrity and ethical values;

• The commitment to competence;

• Leadership philosophy and operating style;

• The way management assigns authority


and responsibility, and organizes and
develops its people;
• Policies and procedures.
How YOU Can Improve the Control
Environment
• Communicate clearly
• Accuracy counts…do not rush
• Don’t just talk the talk, walk the walk
• Use exceptions/errors as opportunities to
teach what’s right
• Don’t let abuse or misuse go
• Don’t be a party to circumvention of
controls
• Perform an annual risk assessment in
tandem with a review/update of your
• unit’s strategic plan
Control Principles/Activities
• These are policies and procedures that
help assure management that directives
are being implemented at all levels of the
organization and include:
• Transaction Authorization- Authorization to
initiate or approve transactions should be
limited to specific personnel.
• Authorizations can be limited by type of
transactions or amount of transactions.
• Used to ensure that employees are
carrying out only authorized transactions
• General (everyday procedures) or specific
(non-routine transactions)authorizations
Control Principles/Activities Cont.
• Separation of duties- provides that one
employee does not have the responsibility
for all phases of a transaction.
• Generally, an employee with physical access
to an asset should not also be responsible
for accounting records relating to that asset.
• The employee should also not authorize the
transaction.
• A compensating control in the event
separation of duties is not possible is close
supervision
Control Principles/Activities Include Cont.
• Accurate documentation of transactions in a timely
manner and retention of records in an organized
manner.
• Validation to ensure that all recorded transactions
fairly represent the economic events that actually
occurred, are lawful in nature, and have been executed
in accordance with management's general authorization.
• Physical safeguarding of assets including
maintaining an inventory and limiting access to assets.
• Audit trails of transactions
• Reconciliations of ledgers to accounting records
should be prepared periodically and reconciling items
should be resolved timely.
Control Principles/Activities Include Cont.
• Independent Verification

• Examples of independent verification


controls include:
 reconciling subsidiary account totals with
general ledger control account balances.
 reviewing computer generated reports that
summarize transaction processing activities.
 comparing physical inventory counts with
quantities in the perpetual inventory records.
Control Principles/Activities Include Cont.

• Counting physical assets periodically,


recording results of the counts, and
comparing to accounting records.
• Discrepancies should be reported to
appropriate administrators and investigated.
• Error handling to ensure that errors detected
at any stage of processing receive prompt
corrective action and are reported to the
appropriate level of management.
• Training, supervising, and monitoring the
performance of employees to help certify that
control processes function properly.
Five Types of Internal Controls
• Preventive controls, the first line of defense, are
designed to keep errors and irregularities from
occurring in the first place - stops something from
happening.
• Detective controls are designed to detect errors
or irregularities that may have occurred finds out
what happened, alerts you as it happens or shortly
after.
• Corrective controls are designed to correct errors or
irregularities that have been detected follow detective
controls, recovery from consequences of an error or
unexpected event.
Five Types of Internal Controls Cont.
• Directive controls are those designed to
establish the desired outcomes – tells you
what should happen.
• Compensating controls are those used to
compensate for controls that are otherwise
lacking.
• Generally, close supervision is used to
compensate for lack of separation of duties.
Preventive Controls
• Preventive Controls Examples.

• Segregation of duties, remember the “ARC”


(separates Accountability (or Authorization)
from Reconciliation, from Custody (of asset).
• No person should perform more than one
function.
• Physical controls over assets

• Authorized signers

• Reminders of policies, procedures, and


expectations
Detective Controls
Detective Control examples:

• Account reconciliations

• Management review of reconciliations

• Physical inventories

• P-Card logging, reconciliation, and


approval

• Review of budget to actual

• Year to year expenditure trending


Corrective Controls
Corrective Control examples:

• Error communication and reporting

• Systems Documentation or processes

• Improvement initiatives
Directive Controls
• Directive controls:
• Policies and Procedures Manual
• Board of directors Policy and Procedures
• Unit procedures

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