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    Internal Control

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    Fidelissp
    Internal controls can be detective, corrective, or preventive in nature. While internal controls provide reasonable assurance of achieving objectives, limitations include human judgment, breakdowns, management override, and collusion. Key internal control objectives are authorization, completeness, accuracy, validity, physical safeguards, error handling, and segregation of duties. Weak or absent internal controls can lead to problems like fraud going undetected due to a lack of segregation of duties, high costs of fraud, and misplaced trust in employees.

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    Internal Control

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    Fidelissp
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    Internal controls can be detective, corrective, or preventive in nature. While internal controls provide reasonable assurance of achieving objectives, limitations include human judgment, breakdowns, management override, and collusion. Key internal control objectives are authorization, completeness, accuracy, validity, physical safeguards, error handling, and segregation of duties. Weak or absent internal controls can lead to problems like fraud going undetected due to a lack of segregation of duties, high costs of fraud, and misplaced trust in employees.

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    Internal controls can be detective, corrective, or preventive in nature. While internal controls provide reasonable assurance of achieving objectives, limitations include human judgment, breakdowns, management override, and collusion. Key internal control objectives are authorization, completeness, accuracy, validity, physical safeguards, error handling, and segregation of duties. Weak or absent internal controls can lead to problems like fraud going undetected due to a lack of segregation of duties, high costs of fraud, and misplaced trust in employees.

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    59 views3 pages

    Internal Control

    Uploaded by

    Fidelissp
    Internal controls can be detective, corrective, or preventive in nature. While internal controls provide reasonable assurance of achieving objectives, limitations include human judgment, breakdowns, management override, and collusion. Key internal control objectives are authorization, completeness, accuracy, validity, physical safeguards, error handling, and segregation of duties. Weak or absent internal controls can lead to problems like fraud going undetected due to a lack of segregation of duties, high costs of fraud, and misplaced trust in employees.

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    INTERNAL CONTROL - NOTES 2

    Internal controls can be detective, corrective, or preventive by nature.

    1. Detective controls are designed to detect errors or irregularities that may have
    occurred.
    2. Corrective controls are designed to correct errors or irregularities that have been
    detected.
    3. Preventive controls, on the other hand, are designed to keep errors or irregularities
    from occurring in the first place.

    1. Limitations of Internal Controls

    No matter how well the internal controls are designed, they can only provide a
    reasonable assurance that objectives will be achieved. Some limitations are inherent
    in all internal control systems. These limitations include:

    • Judgment - the effectiveness of controls will be limited by decisions made with


    human judgment under pressures to conduct business based on the information
    available at hand.

    • 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.

    • Management Override - high level personnel may be able to override prescribed


    policies or procedures for personal gains or advantages. This should not be
    confused with management intervention, which represents management actions to
    depart from prescribed policies and procedures for legitimate purposes.

    • Collusion - control system 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.

    2. 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. They are the conditions which we want the system of
    internal control to satisfy. For a control objective to be effective, compliance with it
    must be measurable and observable.
    Internal audit evaluates the College’s system of internal control by accessing the
    ability of individual process controls to achieve seven pre-defined control objectives.
    The control objectives include:

    1. Authorization,
    2. Completeness,
    3. Accuracy,
    4. Validity,
    5. Physical safeguards and security,
    6. Error handling, and
    7. Segregation of duties.

    • Authorization - the objective is to ensure that all transactions are approved by


    responsible personnel in accordance with their 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 actually occurred, are lawful in nature, and
    have been executed in accordance with management's general authorization.

    • Physical Safeguards and Security - the objective is to ensure that access to


    physical assets and information systems are controlled and properly restricted
    to authorized personnel.

    • Error Handling - the objective is to ensure that errors detected at any stage of
    processing receive prompts corrective action and are reported to the
    appropriate level of management.

    • Segregation of Duties - the objective is to ensure that duties are assigned to


    individuals in a manner that ensures that no one individual can control both
    the recording function and the procedures relative to processing a transaction.

    A well designed process with appropriate internal controls should meet most if not all
    of these control objectives.

    3. What Can Happen When Internal Controls Are Weak or Not Exist
    When we recommend improving controls within a department, we often hear three
    basic arguments for not implementing our recommendations:
    1. There is not enough staff to have an adequate segregation of duties;
    2. It is too expensive; or
    3. The employees are trusted and controls are not necessary.

    These arguments represent pitfalls to unsuspecting management. Each argument is in


    itself a problem that needs to be resolved.

    The problem of not having enough staff or other resources should be discussed with
    your supervisor. In most cases, compensating controls can be implemented in
    situations where one person has to do all of the business-related functions for a
    department.

    If implementing a recommended control seems too expensive, be sure to consider the


    full cost of a fraud that could occur because of the missing control. In addition to any
    funds that may be lost, consider the cost of time that would have to be spent by the
    department during an investigation of the matter, and the cost of hiring a new
    employee. Fraud is always expensive and the prevention of fraud is worth the cost.

    Finally, consider the issue of trust. Most employees are trustworthy and responsible
    and this is an important factor in employee relations and departmental operations.
    However, it is also the responsibility of administrators to remain objective.
    Experience shows that it is most often the trusted employees who are involved in
    committing frauds.

    Departments conducting research are good examples of areas where sound internal
    controls are needed. Research departments that have grants and contracts with
    outside sponsors are at risk that inappropriate charges will be posted to a project
    account, perhaps affecting current or future funding. Each department not only has
    the responsibility to ensure that all of their transactions have been processed properly
    but also to ensure that other researchers are not "hiding" improper transactions in the
    department's accounts

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