Internal_Control

An internal control system comprises the control environment and control procedures. Control environment is the overall attitude awareness and action of Directors and management regarding the internal controls and their importance of the entity. it encompasses the management style and corporate culture and vales shared by all employees. It provide a background against which various other controls are operated . Management's attitude is of paramount importance in deciding how risks are to be controlled. If the attitude towards control and order is positive and management demonstrates a commitment to keeping it so, staff at all levels will be more likely to behave properly. If that sounds slightly naïve, then consider the alternative view. If management does not demonstrate its interest in the control system then staff will have no particular incentive to implement it fully and effectively and there is a stronger probability that it will falter. Control procedures are policies and procedures in addition to the control environment which are established to achieve the entity’s specific objectives. Control procedures Control procedures do not necessarily cost much to implement. It is often possible to design procedures so that worthwhile controls can be implemented at little or no cost. However, there will typically be some cost to having a control system in place and some of the costs of having a control may be difficult to measure (e.g. stifling the creativity and initiative of staff). Controls should be designed in a coherent manner that achieves a designated set of objectives. Management should decide what the system is intended to achieve and then ensure that it does so in a cost-effective manner. Control procedures can take a host of different forms. As with the control environment, these have to be designed to achieve a worthwhile set of objectives. The different types of control are: Organisation Segregation of duties Physical Authorisation and approval Arithmetical and accounting Personnel Supervision and management There are four types of control objective: Detective Directive Preventive Corrective In determining its policies for a system of internal control, boards need to consider: the nature and extent of the risks facing the company. the extent and types of risk which are acceptable for the company to bear. the likelihood of the risks materialising. the ability of the company to reduce the incidence and severity of risks that do materialise. the costs of operating controls compared with the benefit obtained in managing the risk. The board is responsible for the company’s system of internal control. It should set policies on internal control and seek assurance that the system is working effectively and is effective in managing risks. It is the management’s role to identify and evaluate the risks faced by the company for consideration by the board. Management must also implement board policies on risk and control by designing, operating and monitoring a suitable system of internal control. The Turnbull guidance identified the elements of a sound system of internal control as the policies, processes, tasks and behaviours that: facilitate its effective and efficient operation by enabling it to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the company’s objectives. help ensure the quality of internal and external reporting. help ensure compliance with laws and regulations and with internal policies about the conduct of the business. A system of internal control will reflect its control environment and include: control activities. information and communication processes. processes for monitoring the effectiveness of the internal control system. The system of internal control should: be embedded in the operations of the company and form part of its culture. be capable of responding quickly to evolving risks. include procedures for reporting immediately to appropriate levels of management. highlight any significant control failings or weaknesses