1. Internal Control and
Control Self Assessment
Presented by CA Manoj Agarwal
December 30, 2012, Thane CPE Study Circle of WIRC, ICAI

2. Disclaimer
• All the contents of the presentation constitute the opinion of
the speaker, and the speaker alone; they do not represent the
views and opinions of the speaker’s employers, supervisors,
nor do they represent the view of organizations, businesses or
institutions the speaker is, or has been a part of.
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3. Agenda
• Internal Control
• Control Self Assessment
• Case Study
• Q&A
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4. Definitions
Internal Auditing definition states the fundamental purpose, nature, and
scope of internal auditing.
Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control,
and governance processes
Internal control is defined by COSO (www.coso.org) as follows:
Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives relating to operations, reporting, and
compliance.
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5. Internal Control
On paraphrasing definition of Internal control, we get:
1. Geared to the achievement of objectives in one or more separate but
overlapping categories
2. A process consisting of ongoing tasks and activities—it is a means to an
end, not an end in itself.
3. Effected by people - it is not merely about policy and procedure manuals,
systems, and forms, but about people and the actions they take at every
level of an organization to effect internal control.
4. Able to provide reasonable assurance, not absolute assurance, to an
entity’s senior management and board of directors.
5. Adaptable to the entity structure - flexible in application for the entire
entity or for a particular subsidiary, division, operating unit, or business
process
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6. COSO Internal Control Framework
• Objectives of Internal Control
– Operational Objectives - Effectiveness and efficiency of operations
– Reporting Objective - Reliability of reporting
– Compliance Objectives - Compliance with applicable laws and regulations
• Process
– Policies (Management Statement what should be done)
– Procedures (Actions that implement policies)
• Process is managed through Planning, Executing (doing), Checking,
amending (Planning Do Check Act)
PDCA 5 Components of Internal Control
Plan Control Environment
Risk Assessment
Do Control Activities
Check Information &Communication
Act Monitoring Activities
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7. Principles of Internal Controls
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8. Principles of Internal Controls-1
Components Principles
Control 1. The organization demonstrates a commitment to integrity and ethical
environment values.
2. The board of directors demonstrates independence of management
and exercises oversight for the development and performance of
internal control
3. Management establishes, with board oversight, structures, reporting
lines, and appropriate authorities and responsibilities in the pursuit of
objectives.
4. The Organization demonstrates a commitment to attract, develop, and
retain competent individual in alignment with objectives.
5. The organization holds individuals accountable for their internal control
responsibilities in the pursuit of objectives.
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9. Principles of Internal Controls-2
Components Principles
Risk 6. The organization specifies objectives with sufficient clarity to enable
Assessment identification and assessment of risks relating to objectives
7. The organization identifies risks to achievement of its objectives across
the entity and analyses risks as a basis for determining how the risks
should be managed.
8. The organization considers the potential of fraud in assessing risks to
achievement of objectives.
9. The organization identifies and assesses changes that could significantly
impact the system of internal control.
Control 10.Select and develops control activities that contribute to the mitigation
Activities of risks to the achievement of objectives to acceptable levels.
11.Select and develops general control activities over technology to
support the achievement of objectives.
12.Deploy control activities as manifested in policies that establish what is
expected and in relevant procedures to effect the policies.
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10. Principles of Internal Controls-3
Components Principles
Information and 13.The organization obtains or generates and uses relevant, quality
Communication information to support the functioning of other components of
internal control
14.The organization internally communicates information, including
objectives and responsibilities for internal control, necessary to
support the functioning of other component of internal control.
15.The organization communicates to external parties regarding
matters affecting the functioning of other components of internal
control
Monitoring 16.The organization selects, develops and performs ongoing and/or
Activities separate evaluations to ascertain whether the components of
internal controls are present and functioning.
17.The organization evaluates and communicates internal control
deficiencies in a timely manner to those parties responsible for
taking corrective action, including senior management and the board
of directors, as appropriate.
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11. Principle Evaluation Template..1
Principle Evaluation Template — Control Environnent
Control Environment Principles Summary of Deficiencies/Notes/Other
Controls Considerations
(also record deficiencies in log
below)
1. Demonstrates Commitment to Integrity and Ethical Values—The organization demonstrates a commitment to integrity and ethical values.
Sets the Tone at the Top—How do the board of directors and management at all levels
of the entity demonstrate through their directives, actions, and behavior the importance
of integrity and ethical values to support the functioning of the system of internal
control?
Establishes Standards of Conduct—How are the expectations of the board of directors
and senior management concerning integrity and ethical values defined in the entity’s
standards of conduct and understood at all levels of the organization and by outsourced
service providers and business partners?
Evaluates Adherence to Standards of Conduct— What processes are in place to evaluate
the performance of individuals and teams against the entity’s expected standards of
conduct?
Addresses Deviations in a Timely Manner—How are deviations of the entity’s expected
standards of conduct identified and remedied in a timely and consistent manner?
(Other entity specific points of focus, if any)
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12. Principle Evaluation Template..2
Principle Evaluation Template — Control Environnent
Deficiencies Applicable to the Principle
Identificat Internal control deficiency Possible Impact on Evaluate preliminary deficiency List internal control
ion No. description Principle severity: deficiencies related to
(Consider whether other controls to another principle that
effect this principle compensate for the may impact this
internal control deficiency.) internal
control deficiency
Present? Functionin Preliminary Comments/
(Y/N) g? Severity— Compensating
(Y/N) Is internal control Controls
deficiency a major
deficiency? (Y/N)
Evaluate deficiencies within the principle:* <Explanation>
Evaluate if any internal control deficiencies or
combination of internal control deficiencies,
when considered within the principle,
represent a major deficiency.**
<Update Summary of Deficiencies Template as
required>
Evaluate the principle using judgment.** Y/N Explanation/Conclusion
Is the principle present?
Is the principle functioning?
* Note: Record deficiencies in Summary of Deficiencies Template.
** If it is determined that there is a major deficiency, then management must conclude that the component is not present and functioning
and the overall system of internal control is not effective.
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13. Controls Objectives
Objectives Input Process Output
Authorization Is the source authorized? Are the procedures approved? What was approved?
Recording Is it accurate and Who does it? Is it accurate and complete?
complete? When? Is there an audit trail?
Is it timely? Are procedures followed? Is management review adequate?
Is it documented? Is it recoverable? Does it balance?
Is management review adequate?
Safeguarding/ Who should control? Who can access it? Is it confidential?
Security Are duties separated? Are duties separated? Who should have it?
Verification Are sources proper? Are procedures followed complete? Are differences properly
Are investigation and review of resolved?
differences adequate? Is management review adequate?
Existence/ Do policies and Are there procedures to create a Is the residual risk acceptable
Placement procedures define the control? according to the company's risk
adequate level of Are controls adequate? tolerance?
controls? Are controls placed in the most
efficient part of the process?
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14. Controls Objectives-Payroll - 1
Objectives Input Questions to be asked
Authorization Is the source authorized? Is the persons sending the inputs for payroll are authorized
Recording Is it accurate and Is person sends the correct and Complete Inputs?
complete?
Is it timely? Is inputs are send in a timely manner to ensure processing happens as per
plan?
Is it documented? Is there is evidence that inputs have been actually received from person
specified?
Safeguarding/ Who should control? Who should receive the inputs?
Security
Are duties separated? Is the person receiving the inputs is the person who process the payroll?
Verification Are sources proper? How does we know that the person has actually taken information from
correct source?
Existence/ Do policies and Does all this is documented? Does the responsibility has been
Placement procedures define the documented?
adequate level of
controls?
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15. Controls Objectives – Payroll -2
Objectives Process Question to be asked
Authorization Are the procedures approved? Is the process / method to process payroll is approved?
Recording Who does it? Does it can be established who has actually performed which job?
When? Is there any audit trail which can establish that procedures are actually
followed?
Are procedures followed? Is it repeatable?
Is it recoverable?
Is management review adequate? Does some one has review the processing and is there an evidence
which can confirm that review has been actually been performed?
Safeguarding/ Who can access it? Who can access the location/ system/ office processing the
Security information?
Are duties separated? Is there SOD in place?
Verification Are procedures followed Who verify that the process has been actually been followed?
complete?
Are investigation and review of In case of any exception has been observed , then whether the same
differences adequate? has been taken to its logical conclusion and the same is documented.
Existence/ Are there procedures to create a Is someone is responsible to ensure that process has been actually
Placement control? completed as specified?
Are controls adequate? Is any controls have been put in place to ensure that process is
happening as specified?
Are these adequate?
Are controls placed in the most Is control has been put in place to ensure optimum cost and benefit?
efficient part of the process?
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16. Controls Objectives – Payroll - 3
Objectives Output Question to be asked
Authorization What was approved? Is there an evidence that output of the process is authorized and
accountability of person authorizing can be established?
Recording Is it accurate and How is it ensures that output is accurate and complete?
complete?
Is there an audit trail? Is there an audit trail of process of ensuring the completeness of output?
Is management review Is there adequate management review?
adequate?
Does it balance? Does output matches with input to ensure that output is proper?
Safeguarding/ Is it confidential? Is there any guideline defined regarding who should have access the
Security Who should have it? output and to what extent?
Verification Are differences properly In case of any differences observed in management review or a question
resolved? raised in review, the same has been resolved properly with audit trail?
Is management review
adequate?
Existence/ Is the residual risk What is the risk observed and not (insured/controlled) and is that
Placement acceptable according to acceptable to company? Is there any document evidencing acceptance?
the company's risk
tolerance?
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17. Control Types
• Preventative Controls: are installed to stop • Segregation of duties to prevent
undesirable outcomes before they can occur. These intentional wrongdoing,
types of controls are typically the most cost-effective • Proper authorization to prevent
controls because they avoid the cost of improper use of organizational
correction. E.g. resources,
• Adequate documentation and
• Detective Controls: are necessary to measure the records to deter improper
effectiveness of the preventive controls. While some transactions,
errors cannot be effectively controlled through • Physical control over assets to
preventative controls, they must be detected as they prevent their improper
occur. E.g. conversion or use.
• Corrective Controls: are necessary, for they correct • Reviews and comparisons of
the identified deficiency and therefore deter it from records,
occurring again. Documentation and reporting • Independent check on
systems are developed to identify undesirable performance,
• Bank reconciliations,
outcomes and keep problems under management’s
confirmation of bank
purview until they can be solved or the defect can be balances, cash counts,
corrected. • Computerized techniques
Ref: Marks on Governance (http://normanmarks.wordpress.com/) such as transaction limits and
http://www.theiia.org/blogs/marks/index.cfm?postid=396 passwords.
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18. What is CSA?
Control Self Assessment
• A set of techniques used to assess risk, control strength,
and control weaknesses utilizing a control framework.
The 'self' refers to the involvement of management and staff
in the assessment process often facilitated by internal
auditors
• to analyze, within a chosen control framework, the obstacles
and strengths which affect their ability to achieve their key
business objectives, and
• to decide upon appropriate action.
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19. CSA Rationale
• Responsibility for controlling risk belongs to management and
all employees
• People are the most important control factor
• Most employees are honest, competent, and want their
organization to succeed
• People are far more likely to embrace needed changes if they
are involved
in the assessment process
• Helps employees understand control
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20. When do you want to use CSA?
• New work processes/projects
• New organizations
– to identify the risk exposures and required controls
• Reorganizations
• Management / Employee turnover
– to identify where risks are
– to create understanding for business objectives
– to assess how risks are changing
– to put emphasis on highest priority
risks and controls
• Processes that cross over into other work groups
– to get to the root cause of problems
– helps bring groups together
– participants learn how their activities interrelate
– collaborative problem solving
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21. CSA - GOALS & OBJECTIVES
• Provide a forum for participants (stakeholders) to:
– Conduct an assessment of risks and controls.
– Develop recommendations for improvement.
– Enhance their ability to achieve objectives.
– Increase communication with the Unit.
– Improve the efficiency and effectiveness of operations.
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22. Benefits of CSA
• Honest feedback on control environment communication and
monitoring
• Ability to discuss and explore areas of concern to determine
reasons and root causes of concern
• Ability to obtain an understanding of the degree of concern
among participants
• Development of recommendations by employees in the Unit
• Buy-in/Ownership of Recommendations
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23. COSO Framework - Control Components
CSA Traditional
Auditing/Testing
MONITORING
CONTROL ACTIVITIES
RISK ASSESSMENT
CONTROL ENVIRONMENT
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24. Case Study
Case Study
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25. Q&A
Manoj Agarwal
manojbagarwal@gmail.com
9820392252
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