Internal control is defined as policies and procedures adopted by a firm to reasonably ensure objectives are met by preventing, detecting, and correcting errors and irregularities in a timely manner. It has two main subdivisions: accounting controls which safeguard assets and ensure reliable records, and administrative controls which promote adherence to policies and operational efficiency. However, internal control has inherent limitations such as cost-benefit tradeoffs, the possibility of management override, and human errors. The five main elements of an effective internal control system are the control environment, control procedures, accounting and communication systems, risk assessment, and monitoring.

1. INTERNAL CONTROL and
Its ENVIRONMENT
sony

2. Concepts of Internal Control
 Definition - set of policies and
procedures adopted by a firm in order to
provide reasonable assurance that their
objectives will be met. Consequently, it is
considered to be a means of providing
assurance that errors and irregularities
will be prevented, detected and
corrected on a timely manner by
employees of the company.

3. Subdivisions of Internal Control
 Accounting controls
• Those policies and procedures which aim to
safeguard company’s assets and to ensure
reliability of accounting records.
 Administrative controls
• Policies and procedures to encourage
adherence to mgt. policies and to promote
operational efficiency.

4. Inherent Limitations of IC
 Cost – benefit
 Management override
 Collusion or connivance
 Mistakes in judgment / human factors
 Projection risk

5. Elements of Internal Control
 Control environment
 Control procedures
 Accounting and communication system
 Risk assessment
 Monitoring

6. Control Environment
 which means the overall attitude,
awareness and actions of directors and
management regarding the internal
control system and its importance in the
entity.
 Factors reflected in control environment
are: M O F A M P E

7. MOFAMPE stands for
 M – management philosophy and operating style
 O – Organizational structure
 F – Functioning of BOD / Audit committee
 A – Assignment of responsibilities
 M – Management controls
 P – Personnel policies
 E – External Influences

8. Control Procedures
 which means those policies and
procedures in addition to the control
environment which management has
established to achieve the entity’s
specific objectives.
 Fundamental principles of controls -
ASDAR

9. ASDAR stands for
 A – Authorization ( Specific and General)
 S – Segregation (CARE)
 D – Documentation
 A – Access
 R – Reviews

10. Accounting and Communication
System
 Interrelated set of components which
aims to convert data into meaningful
information and providing such
information to authorized users.

11. Risk Assessment
 Ability of management to take actions in
response to business risks and providing
solutions to identified problems.
 Capability of management to find out
root-cause of problems and formulating
appropriate solutions thereon.

12. Monitoring
 To provide reasonable assurance that
the other elements of internal control are
being applied as prescribed. Normally
performed by internal audit department.

13. Responsibility of Parties
 Management and those in-charge of
Governance – primary party responsible
in designing and implementing internal
controls.
 Employees – entrusted with the PDC of
internal controls.
 Auditor – understanding IC for planning
purposes.

14. Reasons for understanding
internal control
 identify the types of potential material
misstatements that could occur in the
financial statements;
 consider factors that affect the risk of
material misstatements; and
 design appropriate audit procedures.

15. Things to be considered by
Auditor
 understanding the design of internal
control whether they are placed in
operation
 Assessment of risks ( inherent and
control )
 Documentation

16. Assessment level and
Documentation
 Maximum level – no tests of controls, document
understanding of the design and document the
conclusion of assessment.
 Below Maximum level – identify controls likely
to be effective; perform tests of controls;
document understanding of the design;
document conclusion of assessment; and
document basis for conclusion

17. Techniques of documentation
 Narrative description
 Flowcharts
 Checklists
 Internal Control Questionnaire

18. Other Concerns
 Tests of Controls
 Reportable Conditions
 Communication of results

19. SMILE JAPON
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