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Internal Control

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8 views

Internal Control

Uploaded by

Good Life
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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General info

Saturday, 23 March 2024 10:57

Internal control refers to the system of policies and procedures put into place to prevent fraud , damage
and errors in a business
- These encourage working ethically and give managers the tools to understand, detect & minimise
risks.

Types of controls
1. Preventive
- Prevent unwanted events
- Limited access to accounts
2. Detective
- Find and report unwanted events
- Reconciling books and physical items
3. Corrective
- Corrects effects of unwanted events
- Water sprays when a fire is detected

Internal control components


1. Internal control environment
- Attitude towards internal control
- Lays the platform for internal controls
2. Risk assessment
- Identifies risks and their effects on the business
- Finding situations that would prevent the achievements of objectives & the effects they would
have on the business
- e.g. effects of foreign exchange on a exporting business
3. Monitoring performance
- Continuous checking of the effectiveness of the internal control systems
- Should be analysed and updated often
4. Information systems and communication
- Allows information to be stored, analysed, represented and communicated
- Ensures the business is aware of the internal controls of the business
- A formal line of communication needs to be followed so that employees can communicate
relevant information to the relevant people.
5. Control activities
- Needed for all business activities
○ Documentation: all information needs to be recorded
○ Authorisation: Proper authorisation should occur for transactions
○ Internal checks: Regular check that procedures are being followed
○ Physical safekeeping: assets and documents need to be taken care of and safely stored
○ Division of duties: tasks must be divided amongst employees
○ Responsibility: one person should be responsible (accountable) for one activity

Internal control Page 1


Internal Audit
Monday, 25 March 2024 14:50
• Internal auditor: reviews the internal control elements, risk management and governance of a business and
gives recommendation on how to improve
• They are independent of the tasks they review so they can report objectively
• They also review policies, procedures and operations. Ensure laws are followed, detect fraud, theft and errors

Steps for an internal audit


Plan
• Internal audit team plan a audit every year
• They need to understand the objectives of the business.
• Each member should have a specific responsibility

Audit evidence
• Information collected during the internal audit
• Evidence is sued to make recommendations
1. Samples
- Statistical sampling: statistics are used to determine the sample
○ Random sampling: all items stand an equal chance to be chosen. Random numbers are generated
to determine which items to use in a sample
○ Systematic sampling: A random item is chosen. A number is chosen. Count the number of items
after the first random item that was selected and then systematically adding items to the
sampling.
- Non-statistical sampling
○ Judgement is used to determine samples
○ Selected based on what the auditors believe should form part of the sample
2. Methods to gather Audit evidence
- Evidence should be relevant and reliable
○ Observation
▪ To see whether the employees are working correctly and efficiently
▪ e.g. ensure employee is ordering items correctly
○ Analysis
▪ The information being collected and determine unusual results
▪ e.g. the GP was lower than other years. Auditor finds reasons to ensure no mistakes or fraud
was present
○ Inspection
▪ The physical accounting records and the assets need to be checked to see if internal controls
are being followed.
▪ e.g. checking if receipts were recorded correctly in the CRJ
○ Enquiry and confirmation
▪ Discuss the procedures that are followed with relevant people
▪ Creditors can be contacted to confirm purchases and payments
▪ e.g. auditor interviews managers and find out how they ensure that everyone in their division
is following procedures
○ Recalculation
▪ To ensure figures were calculated correctly
▪ e.g. auditor does the calculations again

Report
• A report is created at the end of the audit
• It must include objectives, methods used, important findings and recommendations
• CAE (Chief Audit Executive) is the senior in the audit team
- They present the internal report to the management and the relevant committees
- Works closely with the management to ensure all resources are available for an effective internal audit
- e.g. financial statements and relevant staff

Internal control Page 2

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