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What Is Internal Control ?
“A process effected by an entity’s board of
directors,management and other
personnel,designed to provide reasonable
assurance regarding the achievements of
objectives in the following categories:
♦ Effectiveness & efficiency of operations.
♦ Reliability of financial reporting.
♦ Compliance with applicable laws and regulations.”
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♦ Internal control is a process. It is a means
to an end, not an end in 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
provide only reasonable assurance, not
absolute assurance, to an entity’s
management and board.
♦ Internal control is geared to the
achievement of objectives in one or more
separate but overlapping categories.
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Components Of Internal Control
♦ Control Environment.
♦ Risk Assessment.
♦ Control Activities.
♦ Information & Communication.
♦ Monitoring.
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Control Environment
♦ Sets the tone of the organization.
♦ The foundation for all other components.
♦ It includes the integrity,ethical values and competence of
the people.
♦ Reflects: management’s philosophy & operating style,the
way management assigns authority and responsibility and
organizes and develops its people, and the attention and
direction provided by the board of directors.
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Risk Assessment
♦ Every entity faces internal &external risks.
♦ Every entity sets objectives.
♦ Risk assessment is the identification and
analysis of relevant risks to achievements of
the objectives.
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Control Activities
♦ The policies and procedures that help ensure
management directives are carried out.
♦ They help ensure that necessary actions are taken
to address risks.
♦ Control activities occur throughout the entity at all
levels and in all functions.
♦ They include activities such as approvals ,
authorization,reconciliations and segregation of
duties.
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Information & Communication
♦ Relevant information must be identified , captured
and communicated in a form & timeframe that
enables people to carry out their responsibilities.
♦ Information systems produce reports containing
operational,financial and compliance –related
information that make it possible to run and
control the business.
♦ Effective communication must occur in a broader
sense,flowing down,across and up the
organization.
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Monitoring
♦ Internal control systems need to be monitored.
♦ Types of monitoring:
- ongoing during the course of operations.
- evaluation for which the scope and frequency will
depend primarily on an assessment of risks and the
effectiveness of ongoing monitoring procedures.
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Responsibilities
Who is responsible for internal control ?
Everyone !
Board of Directors :Governance,guidance & oversight
Management : CEO is the owner
Internal Auditors: evaluate & monitor
Other personnel :information and communication
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What Internal Control Can Do
♦ It can help achieve performance & profitability
targets.
♦ It can help prevent loss of resources.
♦ It can help ensure reliable financial reporting.
♦ It can help ensure compliance with laws.
It can help an entity get to where it wants to
go,and avoid pitfalls and surprises along the
way.
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What Internal Control Cannot Do
♦ It cannot ensure success.
♦ It cannot ensure the reliability of financial
reporting.
♦ It cannot ensure compliance with laws and
regulations.
Internal controls ,no matter how well designed and
operated,can provide only reasonable assurance to
management regarding achievements of an
entity’s objectives.
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Limitations of Internal Control
♦ Judgement.
♦ Breakdowns.
♦ Management override.
♦ Collusion.
♦ Costs Versus Benefits.
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Preventive Controls
♦ Are designed to discourage errors or irregularities
from occurring.
♦ They are more cost-effective than detective
controls.
♦ Examples:
- Segregation of duties
- Authorization
- Firewalls
- Passwords
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Detective Controls
♦ Are designed to search for and identify errors after
they have occurred.
♦ They are more expensive than preventive controls
.
♦ Examples:
- Reconcilaitions
- Analysis
- Periodic Inventory
- Surveillance cameras
- Audit
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Corrective Controls
♦ corrective controls are designed to restore a
system to an approved/last known good
state.
♦ Examples:
- Anti Virus software.
- Adjusting entries.
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Directive Controls
♦ Are designed to provide direction from
management. (Actions taken to cause or
encourage a desirable event to occur).
♦ Examples:
- Job Description
- Training
- Policies and procedures.