Internal Controls address risks that threaten the achivement of business objectives (Operational, financial reporting, compliance with laws etc). In the case of financial reporting: Prevent fraud and error so as to achive the objective of producing reliable financial statements.
2. Why are auditors interested in internal control?
Auditors interested to know whether or how the errors can be detected and corrected / fraud can be prevented. An understanding of internal control helps the auditor to identify the risk of material misstatements and plan the extent of substative procedures. Examples control systems is not effective or test of controls show that controls not reliable, substantive checks and vouching.
The graph for Internal Control System
Key compenents of internal control
-(1)Control Environment
-(2)Risk Assessment
-(3)Information System
-(4)Control Activities
-(5)Monitoring Controls
(1) Control Environment (Software & Hardware)
-Culture control
-Management emphasis and commitment on internal controls : enforcement vs overriding
-Orgnisational structure, authorithy and responsibility
-Documentation of policies and procedures
(2) Risk Assessment process
-Managment identifies possibles areas of weaknesses within the financial reporting system and put in measures to prevent errors or fraud occuring (eg. segregation of duties, authorisation of transactions)
(3) The information System
-Record, Process and Report Transactions
-Gather other information for preparing Financial Statements (eg.for Depreciation)
(4) Controls Activities
-Measures put in the place to detect and correct errors (eg.segregation of duties, authorisation of transactions)
(5)Monitoring Activities
-Checking the output of process to see if operating as expected?
-Achieving Objectives ?
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