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Internal Controls

Group 4
by

sarah thomas

on 5 November 2012

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Transcript of Internal Controls

. State why risk assessment is important in relationship to internal control. Internal Control is defined by the United States General Accounting Office as “An integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: Effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.” Internal controls are important because they are a major part of managing an organization. They are the first line of defense in safeguarding assets. Internal controls also make it possible to prevent errors and detect fraud. The GAO goes on to say “Internal control should be designed to provide reasonable assurance regarding prevention of or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets.” Define Internal Controls and explain why they are important. Internal Controls begins to take root at the base, with the administration ("Internal controls framework," 2000) and its overall climate. It is important that the administration’s approach be upfront and purposeful to set the proper tone for the people in the organization. In most government organizations the controls are fulfilled by the private sector managers and such controls are clearly outlined for the public to view ("Office of the," 2005).
Internal controls are not only vital for smooth operation but all personnel are subject to them and to reevaluations of them. Even the White House reexamines the effectiveness of their internal controls and remodels when necessary (Memo, 2004). It is at the manager’s level that these changes can occur and take shape so as to set further precedents and guidelines for the rest of the company’s associates. Identify who is responsible for internal controls. Identify an organization's duties when it comes to establishing and maintaining internal controls. After the organization’s initial implementation of internal controls, it’s important to maintain processes as not to create an illusion of internal controls. Strategic Finance’s “The Illusion of Internal Controls” gives solutions to keeping an IC plan relevant.
“Internal Controls (ICs) are the backbone of any thriving, dynamic organization. Chiefly they ensure financial reporting reliability, operational effectiveness and efficiency, and legal/regulatory compliance” ( Atwood, Raiborn, Bulter, 2012). “Though essential to preventing and detecting internal fraud, ICs are often allowed to deteriorate over time or simply become ineffective because of organizational changes” (Atwood et al., 2012 ) Instead of using internal controls these examples create illusions that controls are being followed.
If a plan is already in place and every few years, the company should evaluate what internal controls they are using and if they are effective.
•What factors have changed since the initial implementation?
•Has the technology changed?
•Are new employees getting the same initial training?
•Is an encryption system being used for network?
•Is sensitive data being accessed at designated confidential work stations?
• Are passwords being utilized? Are passwords being changed frequently?
•Is an offsite backup system in place? Explain the COSO internal control model including its five components of internal control National Committee on Fraudulent Financial Reporting was created in 1985. The committee was the collaborative effort of five different professional organizations.
•American Institute of Certified Public Accountants (AIPCA)
•American Accounting Association (AAA)
•Financial Executives International (FEI)
•Institute of Internal Auditors (IIA)
•Institute of Management Accountants (IMA)
Its main purpose was to identify potential areas of fraudulent activities, and how to create guidelines to prevent them from occurring.
In 1992, COSO commissioned PwC (previously Coopers and Lybrand) to further explore the current issues in accounting controls and create a report with their findings. This report was called Internal Control – Integrated Framework.
This report identified the different variables which could affect the current standard of accounting practices – processes, people, reasonable assurance and objectives. It took these variables and worked to create acceptable foundations of internal controls. These five controls are:
•Control Environment - This is the core ingredient for successful controls and is based on the individuals and their strengths. Basic to this are the ethics of the individual and their environment, as well as their understanding and competence in the field of accounting.
•Risk Assessment – The entity must create a collaborative organization and bring in every division to make sure all are sharing the same goal and operating with the same values. The entity must identify, analyze and minimize all the associated operating risks.
•Control Activities – Definite policies and procedures must be defined and communicated to ensure all activities of the entity are carried out as defined by management.
•Information and Communication – These key components allow the information exchange which must occur for an organization to effectively carry out its objectives.
•Monitoring – This is the ongoing process of evaluating the current success of the entity, and adapt to any changes needed. Risk assessment is a step in a risk management procedure. Risk assessment is the determination of the value of risk related to a situation or threat. One of the main goals of internal control is to identify the risks that benefit the organizations goals and to do what is needed to maintain those risks. Without any form of risk assessment the organization would not know what objectives and goals to take risks on and which not to take a risk on. Risk assessment is responsible for identifying those risks that could prevent the organization from achieving their objectives or goals. Group 4 Internal Controls
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