Introduction to

Internal Control
MIDTERMS – CHAPTER 4

(IVY LUBIANO, CPA, MMBM)

Nature and Purpose of Internal
Control

INTERNAL CONTROL – the process designed and effected

by those charged with governance, management and other
personnel to provide reasonable assurance about the
achievement of the entity’s objectives with regard to
reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable laws and
regulations.
Objectives of Internal Control:

Reliability of the Entity’s Financial Reporting

Effectiveness and Efficiency of Operations

Compliance with applicable laws and

regulations
Internal Control System
Elements of Internal Control
The Control Environment

The Entity’s Risk Assessment Process

The Information System, including the related

business processes, relevant to financial
reporting, and communication

Control Activities

Monitoring of Controls
A. Control Environment

The overall attitude, awareness and actions

of directors and management regarding the
internal control system and its importance in
the entity.
Factors in the Control Environment
a. The function of the board of directors and its committees
b. Management’s philosophy and operating style
c. Communication and Enforcement of Integrity and
Ethical Values
d. Commitment to Competence
e. The entity’s organizational structure
f. Methods of assigning authority and responsibility
g. Separation of duties
h. Human resources Policies and Procedures
i. Internal audit function
B. Risk Assessment

Lab Safety
The identification, analysis and management
of risks pertaining to the preparation of
financial statements.
Insert Your Name Here
Some circumstances that causes risks
a. Changes in operating environment
b. New personnel
c. New or revamped information system
d. Rapid growth
e. New technology
f. New business models, products or activities
g. Corporate restructurings
h. Expanded foreign operations
i. New accounting pronouncements
 C. Information Systems
Consists of infrastructure (physical and
hardware component), software, people,
procedures, and data.
Objectives of the Information System
Business Process Activities
Develop, purchase, produce, sell and
distribute an entity’s products and services
Ensure compliance with laws and
regulations
Record information, including accounting
and financial reporting information
Components of an Information System
(methods and records)
Identify and record all valid transactions
Describe on a timely basis the transactions in sufficient detail to permit
proper classification of transactions for financial reporting
Measure the value of transactions in a manner that permits recording
their proper monetary value in the financial statements
Determine the time period in which transactions occurred to permit
recording of transactions in the proper accounting period
Present properly the transactions and related disclosures in the financial
statements
 D. Control Activities
A. PERFORMANCE REVIEW
1. Comparing actual performance with budgets,
forecasts,
prior period performance and benchmarks
2. Investigating performance indicators based on
operating or financial data
3. Reviewing functional or activity performance against
standards, economic statistics or targets
B. INFORMATION PROCESSING CONTROLS
1. Proper authorization of transactions and activities
2. Segregation of duties
3. Adequate documents and records
4. Safeguards over access to assets
5. Independent checks on performance
C. PHYSICAL CONTROLS
- security, access, periodic counting & variance analysis
E. Monitoring of Controls
The process that an entity uses to assess the
quality of internal control over time.
Lab Safety
May include studying trends, and
Insert Your Name Here
communication or confirmation with external
parties.
FOR NEXT MEETINGS:
1. Read up some more online resources on internal control.
2. The group will be divided into 4. Each group will discuss 1
exercise (pages 212 to 215: Group 1 – Exercise 1, Group 2 –
Exercise 2, Group 3 – Exercise 3, Group 4 – Exercise 4).
3. Next meeting’s class session will be dedicated to group
discussions on the requirements of each Exercise.
4. The subsequent meeting will be dedicated to your group
reporting, regarding your group’s answers to your assigned
exercise.
5. Along with oral reporting, the group will submit a written
report on your answers, indicating the names of your group
members (for attendance and grading).
Check up Quiz (25 points)

1. Differentiate between Internal Control and Internal

Control System.
2. Enumerate and define the Elements of Internal Control.
3. What are the objectives of an Information System?
4. Enumerate the different Control Activities.
5. As a member of a student organization, identify and
define some internal controls that should be implemented
in the management of the organization’s cash collections
and donations (from membership dues, fund-raising
activities, etc).
Thank you!