2 of 2--Internal Controls Sp 2010

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Short presentation on 'internal controls for the class IPOL 8530 'The Finance Function' in Social Change Organizations'. This class is part of the Master of Public Administration (MPA) program in the Graduate School of International Policy & Management at the Monterey Institute of International Studies (MIIS). Presentation created by Alfredo Ortiz Aragón, adjunct professor.

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2 of 2--Internal Controls Sp 2010

  1. 1. IPOL 8530—Spring 2010 <br />The Finance Function in Nonprofit & Public Organizations<br />Alfredo Ortiz<br />
  2. 2. Policies and procedures—Internal controls<br />Increasing transparency and safeguarding assets<br />2<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  3. 3. Reasons for internal controls<br />3<br />Mostly on the governance side of things<br />Safeguard the assets of the organization<br />Prevent unintentional misstatements of accounts and reports<br />Run the business efficiently, with rules that work, and apply to everyone (consistency)<br />Create an environment of stewardship and accountability<br />Compliance with laws and regulations<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  4. 4. Caveats for internal controls<br />Provides reasonable, not absolute assurance that objectives will be met<br />Reasonable assurance should provide appropriate balance between risk and level of control—controls must always be gauged to respond to the actual level of risk. <br />Stronger controls for higher risk levels and fewer controls for lower risk levels.<br />Cost/benefit?<br />But…<br />Policies & procedures around internal controls must first be balanced to fulfill their control need.<br />4<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  5. 5. Internal Control per A-133<br />5<br />A process, effected by an entity's management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories<br />Effectiveness and efficiency of operations;<br />Reliability of financial reporting; and<br />Compliance with applicable laws and regulations <br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  6. 6. Questions To Ask When Identifying Risk<br />What assets do we need to protect? Where are we particularly vulnerable?<br />What could go wrong?<br />What activities are regulated by the government?<br />What’s our greatest legal exposure?<br />How do we protect our reputation?<br />6<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  7. 7. Common Areas of High Risk<br />Procurement<br />Equipment<br />Petty cash<br />Travel<br />Payroll<br />7<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  8. 8. Internal controls<br />8<br />Our internal controls processes should address the following:<br />The control environment<br />Risk<br />Information and communication flows<br />Control activities<br />Monitoring <br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  9. 9. Control environment<br />9<br />Sets the organizational tone, influences control consciousness of people and is the foundation of internal controls. <br />Integrity and ethical values<br />Commitment to competence<br />Human resource policies & practices<br />Board of directors and audit committee<br />Management philosophy and operating style<br />Organizational structure<br />Assignment of authority & responsibility<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  10. 10. Risk—susceptibility of material misstatement<br />10<br />Inherent risk<br />Comes from within<br />Could have to do with the nature of the business<br />Control risk<br />The risk that a company's internal controls are insufficient to mitigate or detect errors or fraud<br />Based on assessed strength of internal controls system<br />Detection risk<br />The risk that the auditor will not detect a material misstatement that exists in the financial statements<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  11. 11. 11<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  12. 12. Information & communication<br />12<br /><ul><li>How reliable is the information system and accounting system—technology, structure, maintenance, etc.?
  13. 13. How clear is the communication system regarding individual roles and responsibilities of operating the internal control system?</li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  14. 14. Control activities<br />13<br /><ul><li>Actions or procedures that manage or reduce risk
  15. 15. Preventive and Detective Controls
  16. 16. Preventive – attempt to deter or prevent undesirable events
  17. 17. Detective - attempt to detect undesirable events after the fact</li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  18. 18. Control activities<br />14<br /><ul><li>Information processing controls
  19. 19. General systems, hardware, software
  20. 20. Procedural controls
  21. 21. Authorizations
  22. 22. Documentation
  23. 23. Independent checks
  24. 24. Segregation of duties
  25. 25. Physical controls
  26. 26. Activity performance reviews
  27. 27. Continual budget vs. actual
  28. 28. Relationship of non-financial to financial data
  29. 29. Training graduates vs. training expense</li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  30. 30. Monitoring <br />15<br /><ul><li>Investment in improving processes and innovation
  31. 31. Willingness to allow professional diagnosis for improvement
  32. 32. External audits
  33. 33. Scheduled (but not announced) internal testing of systems </li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  34. 34. Reminder—Written procedures<br />16<br />Test if written procedures exist and are followed covering the following areas:<br />A/R<br />A/P<br />Procurement<br />Inventory and asset control<br />Accounting processes<br />Cost evaluation<br />Other relevant procedures<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  35. 35. Basic Controls<br />17<br />Control over receipts<br />Pre-numbered receipts<br />2 people for Cash collections and mail and make list of receipts <br />Timely deposits—everything into the bank<br />Monthly reconciliation to invoices or other billings<br />Control over disbursements<br />Always by check with support (use a standard internal doc)<br />Prior authorization<br />Tied to budget (i.e. planned)<br />Contract in place?<br />More than one sig?<br />Have someone else reconcile the bank account<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  36. 36. Written procedures—A/R <br />A/R procedures<br />Simple A/R cycle<br />18<br />Billing and how invoices are processed<br />How payment is followed up (avoid overly “aged” AR)<br />Opening the mail<br />Receiving money<br />Recording receipt of money<br />Depositing money, and,<br />Reconciling bank accounts. <br />How and when we bill for services and get paid<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  37. 37. Written procedures—A/P <br />Simple A/P procurement cycle<br />A/P procedures<br />19<br />Verifying proper authorization before checks are run<br />Setting limits on when two signatures are needed<br />Petty cash system for very small purchases <br />No duplicate payments<br />Payment against invoice<br />Bill stamped paid<br />Control of the check stock<br />Receipt of goods in proper condition<br />Easily accessible, relevant documentation<br />How and when we enter into purchases and pay our bills<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  38. 38. Definition of Auditing<br /><ul><li>A systematic process of objectively… evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.</li></ul>Source: American Accounting Association<br />20<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  39. 39. Try this again<br />21<br /><ul><li>A logical, organized process of examining what you do in comparison with what you should be doing—all measured against established criteria.
  40. 40. The process communicates an opinion as to the reliability of what you say (assert) you do and may help or hurt your credibility as an organization. </li></ul>Source: Me<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  41. 41. Why are audits needed?<br />22<br />FASB states that 2 primary qualities make accounting information useful for decision making:<br />Relevance<br />Reliability<br /><ul><li>Users of financial statements look to the independent auditor’s report to see if these qualities have been met</li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  42. 42. Required Scope of A-133 Audits<br />23<br /><ul><li>GAAP
  43. 43. Financial Statements
  44. 44. Internal Controls
  45. 45. Compliance with:
  46. 46. laws,
  47. 47. regulations,
  48. 48. Provisions of contracts or grant agreements that may have a direct and material effect on each of its major programs.
  49. 49. Follow up</li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  50. 50. Auditor minimum expectations<br />24<br />Stakeholders expect auditors to:<br /><ul><li>Perform the audit with:
  51. 51. Technical competence
  52. 52. Integrity
  53. 53. Independence
  54. 54. Objectivity
  55. 55. Detect intentional or unintentional material misstatements
  56. 56. Prevent the issuance of misleading financial statements</li></ul>MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  57. 57. Internal controls cases<br />http://www.eurojournals.com/irjfe_27_11.pdf<br />http://www.colorado.edu/ArtsSciences/facultystaff/administration/budget/docs/CaseStudies.pdf<br />http://jobfunctions.bnet.com/abstract.aspx?docid=55890<br />Do a Google search—there is tons online<br />25<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />
  58. 58. Exercise<br />26<br /><ul><li>Share your story as a blog post either individually or as a group.
  59. 59. If as a group, create a single group story mixing the best of all the stories
  60. 60. Make it dramatic
  61. 61. Exaggerate to make a point
  62. 62. Change names and dates to protect the innocent
  63. 63. Use the framework below to guide your discussion if needed
  64. 64. Post the story to the wiki (1 for the group)
  65. 65. If individual, post individually</li></ul>Share an internal control story from your own experience. It could be:<br />Witness of risky behavior or actual loss<br />Or accident waiting to happen<br />Something caught in the nick of time, i.e. good procedures<br />Too much control<br />Not enough control<br />Etc.<br />MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"<br />

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