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Good internal controls are essential to assuring the accomplishment of goals and objectives. They provide reliable financial reporting for management decisions. They ensure compliance with applicable laws and regulations to avoid the risk of public scandals. Poor or excessive internal controls reduce productivity, increase the complexity of processing transactions, increase the time required to process transactions and add no value to the activities. Good internal controls help ensure efficient and effective operations that accomplish the goals of the unit and still protect employees and assets.
Internal controls can be: Mandatory or voluntary: Discretionary or non-discretionary: Manual or automated: General controls or application controls: Common control proceduresPhysical controls: Authorisation and approval limits: Segregation of duties: Management controls: Arithmetic and accounting controls: Human resources controls: Internal checkInternal check is a system through which the accounting procedures of an organisation are so laid out that the accounts procedures are not under the absolute and independent control of any person. The work of one employee is complementary of that of another, enabling a continuous audit of the business to be made. The essential elements of an internal check are:
Internal auditDefinition and purposes of internal audit: Internal audit supports management in the effective discharge of their responsibilities. To this end, internal audit furnishes management with analyses, appraisals, recommendations, counsel and information concerning the activities reviewed. Objectives of internal auditThe formal objectives of internal audit may include some or all of the following:
Why internal audit necessary?The importance of internal audit was highlighted by the Turnbull Report. It states that listed public companies that do not have an internal audit function should review the need to have such a function at least annually. Turnbull goes on to state that listed public companies that do have an internal audit function should review the scope, authority and resources of this function at least annually. Turnbull suggests that the need for the internal audit function will depend on several factors. These include:
Internal audit and internal controlInternal audit is an internal but independent assurance function. While internal auditors are usually employees of the organisation, they should operate independently of management so that their analyses, judgements and reports are free from bias or undue influence. The head of internal audit should report to the board of directors, or to the audit committee. Some organisations reinforce independence by outsourcing the internal audit function to professional external firms. Internal audit testing is the internal assessment of internal controls and as such is a management control to ensure compliance and conformity of internal controls to pre-determined standards. Key risks: Financial and operating information: Compliance: Types of auditIn the course of their duties, internal auditors may carry out various types of audit. These include the following: Operational audits may be concerned with the efficiency of the organisation’s activities. They consider performance relative to pre-determined criteria. Systems audits are used to test and evaluate controls as described in the last section. They test whether the controls can be relied upon to ensure that resources are allocated and managed effectively. They also test whether the information provided by the organisation’s systems is accurate. Compliance tests verify whether internal controls are being applied in a proper manner. Substantive tests verify the accuracy of figures, and can be used to identify errors and omissions. A transactions or probity audit is concerned with detecting fraud and other types of criminal or unlawful behaviour. However, it can also be extended to matters relating to fairness of dealings, impartiality, accountability and transparency, sometimes considered to be within the scope of social audit. Generally, social audit may be concerned with any matters relating to governance. Written by a member of the BT/FBT examining team |