Internal Control

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Slide 1: 

INTERNAL CONTROL Sherif Shahin

This session high light the following: : 

This session high light the following: Definition of internal control The activities of internal control Structure of internal control Functions of internal control Principles of internal control Types of internal control Methods of internal control

Slide 3: 

Internal Control is a process, led by a business board of Director and Management, designed to provide reasonable assurance regarding the effectiveness and efficiency of operations, reliability of financial reporting and Business Compliance with applicable laws and regulations. In other words it is the Board of directors and Management way to mitigate any threats to economic welfare of the business. A. Definition of internal control:

Simple Definition : 

4 Simple Definition Internal control is what we do to see that the things we want to happen will happen … And the things we don’t want to happen won’t happen.

Internal Controls Are Common Sense : 

5 Internal Controls Are Common Sense What do you worry about going wrong? What steps have been taken to assure it doesn’t? How do you know things are under control?

Why are Internal Controls Important? : 

6 Why are Internal Controls Important? Compliance with applicable laws and regulations. Accomplishment of the entity’s mission. Relevant and reliable financial reporting. Effective and efficient operations. Safeguarding of assets.

Weak Internal Controls Increase Risk Through… : 

7 Weak Internal Controls Increase Risk Through… Business Interruption system breakdowns or catastrophes, excessive re-work to correct for errors. Erroneous Management Decisions based on incorrect, inadequate or misleading information. Fraud, Embezzlement and Theft by management, employees, customers, vendors, or the public-at-large.

Slide 8: 

8 Statutory Sanctions Penalties arising from failure to comply with regulatory requirements, as well as overt violations. Excessive Costs/Deficient Revenues expenses which could have been avoided, as well as loss of revenues to which the organization is entitled. Loss, Misuse or Destruction of Assets unintentional loss of physical assets such as cash, inventory, and equipment.

Your Organization Benefits from Strong Internal Controls by: : 

9 Your Organization Benefits from Strong Internal Controls by: Reducing and preventing errors in a cost- effective manner. Ensuring priority issues are identified and addressed. Protecting employees & resources. Providing appropriate checks and balances. Having more efficient audits, resulting in shorter timelines, less testing, and fewer demands on staff.

Important Concepts… : 

10 Important Concepts… Internal control is a process; it is a means to an end, not an end itself. Internal control is effected by people; it’s not merely policy manuals and forms but people at every level of an organization. Internal control can be expected to only provide reasonable assurance, not absolute assurance.

Five Key Internal Control Activities… : 

11 Five Key Internal Control Activities… B. Internal control Activities

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Controls can be either Automated or Manual Automated Controls – Incorporated into application logic. Example: System automatically searches for a matching PO before paying an invoice Manual Controls – Performed by individuals outside of the system or application Example: Supervisor’s signature 12

1. Separation of Duties : 

13 1. Separation of Duties Divide responsibilities between different employees so one individual doesn’t control all aspects of a transaction. Reduce the opportunity for an employee to commit and conceal errors (intentional or unintentional) or perpetrate fraud.

2. Documentation : 

14 2. Documentation Document & preserve evidence to substantiate: Critical decisions and significant events...typically involving the use, commitment, or transfer of resources. Transactions…enables a transaction to be traced from its inception to completion. Policies & Procedures…documents which set forth the fundamental principles and methods that employees rely on to do their jobs.

3. Authorization & Approvals : 

15 3. Authorization & Approvals Management documents and communicates which activities require approval, and by whom, based on the level of risk to the organization. Ensure that transactions are approved and executed only by employees acting within the scope of their authority granted by management.

4. Security of Assets : 

16 4. Security of Assets Secure and restrict access to equipment, cash, inventory, confidential information, etc. to reduce the risk of loss or unauthorized use. Perform periodic physical inventories to verify existence, quantities, location, condition, and utilization. Base the level of security on the vulnerability of items being secured, the likelihood of loss, and the potential impact should a loss occur.

5. Reconciliation & Review : 

17 5. Reconciliation & Review Examine transactions, information, and events to verify accuracy, completeness, appropriateness, and compliance. Base level of review on materiality, risk, and overall importance to organization’s objectives. Ensure frequency is adequate enough to detect and act upon questionable activities in a timely manner.

Slide 18: 

C. Internal Control Structure Consists Of Three Components: 1- Control Environment Management and Board of Directors of the Company , set the environment for the business including Management Philosophy ,operation style, and Management Behavior 2- Information system Are usually divided into two aspects: Financial Accounting: Generate the organization’s Financial Statement, budget and Cost. II. Operation Information Systems Generates and gather information related to various operational activities for manages. 3- Control Procedures Specific controls directed at details activity.

Slide 19: 

D. Principles Of Internal Controls The Four Principals Of Accounting System Designed for The Creation Of Effective Controls 1- Control Principle: Accounting system provide internal control features in order to protect firms, assets and insure data reliability. 2- Compatibility principle: Accounting system must be in harmony with organizational and human factor of the business. 3- Flexibility Principle: System should be flexible enough to allow the volume of transaction to grow and organizational change. 4- Cost benefit Principle: Benefits derived and information generated must be equal or greater than the system’s cost ( Tangible / Intangible)

Slide 20: 

E. Function Of Internal Control Controls Should Have Four Pipes Of Functional Responsibility: Authority to execute transactions Record transactions Custody of assets involved in transactions Periodic reconciliation of existing assets with recorded amount (Checking)

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F. Type Of Internal Control: 1- Preventive Controls: Are set to prevent errors and misappropriation of assets ( credit limits) 2- Detective Controls: Are designed to back up preventive controls by detecting errors after occurrence (bank reconciliation) 3- Corrective controls: Are intend to correct problems identified by detective controls (Auto – Edit) 4- Directive Controls: Are designed to produce positive results (set policy to use specific vendors) and it is used to create favorable image for the company in the Community. 5- Compensating controls: Are also called mitigating controls, are designed to compensate for short coming elsewhere in control structure ( segregation of duties)

Slide 22: 

G. Methods Of Internal Control: Internal Controls can be placed into 5 categories: 1- Organizational Control: Establish Statements of Purposes, authority and responsibility for each division in the company. 2- Operational Controls: Include activities such as ; planning budgeting, documentation, and controls over information systems. 3- Personnel Management Controls: Hiring and HR Policies affect adherence to Internal Controls ( Competent and Trustworthy employees combined with timely and effective trainings minimize the corrective need of Internal Control) 4- Review Control (Monitoring Controls): Periodic review help the firm to assess the performance of individual employees and achievement of corporate goals and objectives. 5- Controls for Facilities and equipment: Represent controls for fixed assets of the Corporation., controls for maintaining suitable equipment and facility standards, e.g. protection of fixed assets from theft and damage, fire and smoke alarms, door locks.

Slide 23: 

Danger To Established Controls: Certain human factors and exceptions may present danger to well designed and well supported Policies and procedures. These dangers are often called inherent limitations of internal controls. Major Factors are: Management Override Conflict of Interest.

Slide 24: 

Internal Control Policies And Procedures Should Be Documented. Documentation severed a number of purposes Like audits and Trainings. Most Common Methods used to documents control polices and procedures are (Written Narrative, Flow Charts and Written Job Descriptions)

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