Essentials of Internal Control Speaker: Cheung Hon Wan Edited by : Dick Lam
What financial reports tell <ul><li>summary of past performance </li></ul><ul><li>how much a company have </li></ul><ul><l...
Do the reports right? SURE Management Auditor
Do the reports tell the truth? 1998 World Cup final  France beat Brazil 3:0  ?
Working toward company objectives
What is internal control? <ul><li>A process, effected by an entity’s board of directors, management and other personnel, d...
The process of internal control <ul><li>To define the policy </li></ul><ul><li>To set up the system </li></ul><ul><li>To w...
Internal Control – Comment <ul><li>Policy & procedures not enforceable, you do not understand operations </li></ul><ul><li...
<ul><li>The job only for finance or internal audit </li></ul><ul><li>Too many NATO during the preparation </li></ul><ul><l...
An example: Internal Control  in Purchasing <ul><li>A practical approach </li></ul><ul><li>Role of Finance </li></ul><ul><...
Role of Finance <ul><li>Advantages: </li></ul><ul><ul><li>Relatively high degree of integrity </li></ul></ul><ul><ul><li>C...
Structure of a policy Principles Responsible Dept Owner/Monitor Shall do Shall not do Objectives Procedures Internal Audit
Underlying principles <ul><li>Group Decision </li></ul><ul><li>High degree of transparency </li></ul><ul><li>No hiding of ...
Decision Control <ul><li>Suppliers audit </li></ul><ul><li>Process for order placing </li></ul><ul><li>Approval with level...
Reporting <ul><li>Key Risk Indicators </li></ul><ul><ul><li>Purchasing value & % of single source </li></ul></ul><ul><ul><...
Compensating Controls <ul><li>Organization Culture – Core beliefs </li></ul><ul><li>Provide a channel for reporting irregu...
No single control is sufficient…. <ul><li>Decision Control, Process Control & Compensating must co-exist to ascertain the ...
Be pragmatic….. T I C
No system is perfect !! <ul><li>The arts of recognizing weaknesses…. </li></ul><ul><li>As we know we are weak, we get the ...
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Essentials Of Internal Control

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Material used by my mentor/friend - Cheung Hon Wan in 2005 Internal Control Forum in Shanghai. I am glad for preparing this ppt for his speech

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  • Essentials Of Internal Control

    1. 1. Essentials of Internal Control Speaker: Cheung Hon Wan Edited by : Dick Lam
    2. 2. What financial reports tell <ul><li>summary of past performance </li></ul><ul><li>how much a company have </li></ul><ul><li>for evaluation of past </li></ul><ul><li>for future decision </li></ul>
    3. 3. Do the reports right? SURE Management Auditor
    4. 4. Do the reports tell the truth? 1998 World Cup final France beat Brazil 3:0 ?
    5. 5. Working toward company objectives
    6. 6. What is internal control? <ul><li>A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: </li></ul><ul><ul><ul><li>Effectiveness and efficiency of operations </li></ul></ul></ul><ul><ul><ul><li>Reliability of financial reporting </li></ul></ul></ul><ul><ul><ul><li>Compliance with applicable laws and regulations </li></ul></ul></ul>The Committee of Sponsoring Organizations of the Treadway Commission (COSO)
    7. 7. The process of internal control <ul><li>To define the policy </li></ul><ul><li>To set up the system </li></ul><ul><li>To write up the procedure </li></ul><ul><li>To execute </li></ul><ul><li>To monitor </li></ul><ul><li>To revise regularly </li></ul>
    8. 8. Internal Control – Comment <ul><li>Policy & procedures not enforceable, you do not understand operations </li></ul><ul><li>Policy is not realistic, procedures just create paper work </li></ul><ul><li>Wasting precious working time, lowering operation efficiency </li></ul><ul><li>Requires more staff headcount </li></ul><ul><li>Environment is ever-changing </li></ul><ul><li>Internal control only addresses annually & SOX focuses on published account but does not help business operation </li></ul>
    9. 9. <ul><li>The job only for finance or internal audit </li></ul><ul><li>Too many NATO during the preparation </li></ul><ul><li>Blames on internal control as fraud still exists </li></ul><ul><li>Complaint on blocking the efficiency as the company is running healthy </li></ul><ul><li>Keep on giving chances to incapable staff </li></ul>Internal Control – Observation <ul><li>Lazy </li></ul><ul><li>Expression of authority </li></ul><ul><li>Personal interest </li></ul>
    10. 10. An example: Internal Control in Purchasing <ul><li>A practical approach </li></ul><ul><li>Role of Finance </li></ul><ul><li>The policy & the underlying principles </li></ul><ul><li>Process Control vs. Decision Control </li></ul><ul><li>Compensating controls </li></ul><ul><li>Reporting </li></ul>
    11. 11. Role of Finance <ul><li>Advantages: </li></ul><ul><ul><li>Relatively high degree of integrity </li></ul></ul><ul><ul><li>Conservative & high sensitivity to risk </li></ul></ul><ul><ul><li>Sensitivity to data </li></ul></ul><ul><li>Design the policy and set the objectives </li></ul><ul><li>Review the procedure from Supply Chain </li></ul><ul><li>Participation in operation </li></ul><ul><li>Transaction approval </li></ul>
    12. 12. Structure of a policy Principles Responsible Dept Owner/Monitor Shall do Shall not do Objectives Procedures Internal Audit
    13. 13. Underlying principles <ul><li>Group Decision </li></ul><ul><li>High degree of transparency </li></ul><ul><li>No hiding of information </li></ul><ul><li>Separation of duties </li></ul><ul><li>Audit trail of decision making </li></ul>
    14. 14. Decision Control <ul><li>Suppliers audit </li></ul><ul><li>Process for order placing </li></ul><ul><li>Approval with level of authority </li></ul><ul><li>Order allocation based on scorecard result </li></ul><ul><li>Approval for price changes </li></ul><ul><li>… .. </li></ul><ul><li>Sourcing committee for vendors approval </li></ul><ul><li>Dual sourcing </li></ul><ul><li>3 quotations </li></ul><ul><li>Scorecard system for supplier evaluation </li></ul><ul><li>New suppliers introduction </li></ul><ul><li>Supplier disqualification </li></ul><ul><li>… .. </li></ul>Process Control From Decision to Process
    15. 15. Reporting <ul><li>Key Risk Indicators </li></ul><ul><ul><li>Purchasing value & % of single source </li></ul></ul><ul><ul><li>No. of items with single source </li></ul></ul><ul><ul><li>Price change effects </li></ul></ul><ul><li>Reporting of concessionary activities </li></ul><ul><li>Audit of open book costing </li></ul><ul><li>Progress of corrective action plan </li></ul>
    16. 16. Compensating Controls <ul><li>Organization Culture – Core beliefs </li></ul><ul><li>Provide a channel for reporting irregularities </li></ul><ul><ul><li>Supplier business code of conducts with contact information for complaint </li></ul></ul><ul><ul><li>Suppliers Questionnaire for promoting efficiency and integrity </li></ul></ul><ul><li>Education of staff </li></ul><ul><ul><li>Employees code of conducts, not only focus on disadvantage of non-compliance, but also on the advantage of compliance </li></ul></ul><ul><li>Rewarding system </li></ul><ul><ul><li>Link up control objectives to reward </li></ul></ul><ul><ul><li>control and reward are mutually reinforcing </li></ul></ul><ul><ul><li>control and reward system are important pre-conditions for motivation </li></ul></ul>
    17. 17. No single control is sufficient…. <ul><li>Decision Control, Process Control & Compensating must co-exist to ascertain the effectiveness of internal control </li></ul><ul><li>Positive reward as well as negative reward (punishment) is important </li></ul><ul><li>It is not a shame of explaining a case to employees, pass the right message is even more critical! </li></ul>
    18. 18. Be pragmatic….. T I C
    19. 19. No system is perfect !! <ul><li>The arts of recognizing weaknesses…. </li></ul><ul><li>As we know we are weak, we get the room to become strong </li></ul><ul><li>As we know we are imperfect, we get the will to become perfect </li></ul><ul><li>Continuous review of internal control system is mandatory !! </li></ul>

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