Internal Control

By Dr Safdar A Butt


Internal Control

All that a company does internally to protect its assets, ensure the proper conduct of its affairs and accuracy of its records. Risk management is not just part of “protecting the assets of a company”, it is an essential feature of proper conduct of its affairs.


Objectives of Internal Control
 

That all that is due to the company, comes to the company. That the company pays only what should be paid out That all incomes, expenses, assets and liabilities are properly recorded That the assets of the company are protected That the company’s records are reliable

Tools of Internal Control

Defined Procedures

Only one way of doing an action Segregation of duties (internal check) Physical (cash in safe, maintenance) Managerial (e.g. budgets, limits, approvals, etc.) Supervision Accounting and auditing checks


  

Selection of right personnel

Tools of Internal Control

 

Basic controls Supervisory Controls Internal Checks All of them incorporated in formal procedures.


Basic Controls

    

Detailed procedures Pre-numbering Cross checking of related documents Regular physical verification: cash count, etc. Regular balancing of books Proper custody of all assets, records, unused documents Right employee for the job.

Supervisory Controls

 

Authorization evidence Final approval before final action Review of basic controls applied in each case. Pre-audit of major expenditure or disbursements


Internal Checks

  

Segregation of duties Precise definition of limits and authority Staff rotation Annual leave must be taken No exceptions


Setting Internal Controls

  

Draw internal control policies. Design internal control systems Document all procedures Train the staff Ensure that the procedures are being followed.

Institute internal audit

Curb exceptions.

Designing Procedures

    

Nature of work. Extent of risk. Cost of procedure. Facilitate work, not hamper it. Compliance with laws, regulations Promote efficiency culture Immediate notice of exceptions

Monitoring Internal Controls

The system should generate reports.
Frequency of reports  Adequacy of reports

Regular review of reports and action there-on.
Follow up.  Investigation of major lapses

Internal Audit Certification at critical stages.

Internal Audit

A control that functions by examining and evaluating the effectiveness of other controls. Includes checking, analyses, appraisals, recommendations, advice and information. Regular or Need based.


The internal auditor

 

Part of management; however does not report to management. Detects errors and frauds Helps management correct errors and minimize impact of frauds Helps improve controls.


Advantages of Internal Audit

Keeps workers alert Timely detection of errors & frauds Enhances reliability of accounting and supporting records Reduces external audit work


Types of Internal Audits

  

Regular, continuous internal audit Need based investigation VFM audit for specific purpose Pre-disbursement and post-payment audits. Records audits and Procedure Audits


Limitation of Internal Audit

Internal auditor is an employee, with loyalties to the management. His objective is not to report as he finds things, but get them corrected as well. Only a limited reliance can be placed on him.


Internal Vs External Audit

 

Extent of independence Interests served Scope of work undertaken Reliance of external auditor on the work done by internal auditor.


Board’s Statement on Internal Control
Essentially it is about status of internal controls, e.g.  There is an ongoing process for identifying, evaluating and managing significant risks.  That the process was there during the year under report.  It is being regularly reviewed by the Board.  It is in accordance with Turnbull Guidance



Are control processes part of the normal operational processes? Special communication to the Board by management Monitoring of Management by Board



 

Deliberate and non-obligatory disclosure Made by a person who has privileged info About non-trivial illegality or wrongdoing Regardless of whether it has actually taken place or is likely to take place or perceived to be so Made to an inside or outside party


Classification of Whistleblowers

   

Tipsters Squealers Wtiness Complainant Watchdogs Reporter


Types of whistleblowing

Internal (soft)
Can be handled internally through procedure  Less damaging  Damage control

External (hard)
Internal whistleblowing can avoid this  Procedure still needed to defend  More damaging


Setting up a WB System

Design an integrity policy Design procedure for internal WB
Who should the report be sent in first place?  Format of the report  Process or steps to be taken on the report  Confidentiality  Stick and carrots


Advantages of Internal WB

In itself a control mechanism; keeps managers and employees on guard. Management gets to know before the damage gets too big. Solution easier than handling external WB


Thank you
Dr Safdar A Butt


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