CONTROL

PROCESS
PRIMARY CONTROLS (KEY CONTROLS)
• Primary controls must operate effectively to reduce risk to an acceptable level.
• Following are some examples primary control activities:
• Segregation of duties. Dividing duties among multiple people ('segregating' them) so that one person does not have complete
control over any financial transaction. This reduces the likelihood of errors or improper conduct. For example, someone who
prepares financial statements should not also be responsible for recording transactions.
• Authorizations and approvals. Authorized transactions have been approved by a person with the appropriate level of authority,
and these approvals confirm that the transaction is consistent with policies. For example, a company might require that all
journal entries be approved by the company’s Controller.
• Reviews and reconciliations. Reviewing and reconciling financial records regularly, preferably by someone other than the person
who prepared them, to confirm that transactions have been processed correctly.
• Safeguarding of assets. Physically secure equipment, inventories, cash, and other property, count them periodically, and
compare the counts with control records.
• Training and supervision. Employees need knowledge to do their jobs well, direction and supervision to know what is expected
of them, and channels for reporting any wrongdoing.
SECONDARY CONTROLS
• Secondary controls help the process run smoothly but aren’t essential.
• Examples of secondary controls include:
• Review and approval of transactions: This can be a secondary control to help
ensure that transactions are accurate and authorized.
• Monitoring of key performance indicators (KPIs): This can help to identify
potential issues or deviations from expected performance.
• Regular audits of internal controls: This can help to identify and address any
weaknesses in the control system.
TIME-BASED CLASSIFICATION CONTROLS

• Also known as periodic controls, are a type of internal control that focuses on monitoring and
verifying the effectiveness of other controls over a specific period of time. COSO emphasizes the
importance of monitoring activities, which include periodic evaluations of internal controls.
PURPOSE OF TIME-BASED CLASSIFICATION
CONTROLS:
• Ensuring Ongoing Effectiveness
• Detecting Deviations
• Providing Feedback
TIME-BASED CLASSIFICATION CONTROLS

• Periodic Audits
• Management Reviews
• Self-Assessments
• System Monitoring
TIME-BASED CLASSIFICATION CONTROLS ARE
CLOSELY RELATED TO THE FOLLOWING COSO
COMPONENTS:
• Control Activities:
• They help ensure that control activities are being implemented and followed.

• Monitoring Activities:
• They are a key element of monitoring activities, helping to ensure the ongoing effectiveness of the control
system.

• Information and Communication:

• They facilitate the communication of information about control effectiveness to relevant parties.
TIME-BASED CONTROLS ARE IMPORTANT:

• Adaptability: Controls can be adjusted as needed to adapt to changing

business environments or risks.
• Continuous Improvement: Regular monitoring and evaluation lead to
continuous improvement of the control system.
• Compliance: They help ensure compliance with laws, regulations, and
internal policies.
MANUAL CONTROLS

• Segregation of duties: Ensuring that no single person has complete

control over a process, requiring reviews and approvals from different
individuals.
• Approvals: Manual approval processes for transactions or procedures.
• Reconciliations: Verifying that two sets of records match, such as bank
statements and ledgers.
• Physical security: Controls like locks and alarms to protect assets.
IT-DEPENDENT MANUAL CONTROLS:

• These are manual controls that rely on IT systems for information, such
as reviewing reports generated by the system.
AUTOMATED CONTROLS

• Data validation: Software checks to ensure data accuracy.

• System access controls: Restricting access to authorized personnel.
• System-generated reports: Automated reports for monitoring and control.
• Automated reconciliations: Systems that automatically reconcile transactions.
AUTOMATED CONTROLS

• ADVANTAGES:
• Reduced human error: Automated controls can minimize the risk of mistakes
due to human oversight.
• Increased efficiency: Automated processes can be faster and more efficient
than manual processes.
• Enhanced monitoring: Real-time data analytics and continuous monitoring
tools can provide insights into control performance.
COSO FRAMEWORK AND CONTROLS:
• Control Activities:
• COSO emphasizes the importance of control activities, which include both manual and
automated controls.
• Types of Controls:
• Controls can be preventive (designed to prevent errors), detective (designed to identify errors
after they occur), or corrective (designed to fix errors).
• Integrating Controls:

• A robust internal control system should include a combination of manual and automated
controls, as well as preventive, detective, and corrective measures.
CONTROL
PROCEDURES
PHYSICAL CONTROLS
• Physical controls in internal control are measures that protect assets by
restricting physical access. They prevent unauthorized access, theft,
damage, or misuse of company assets.
TYPES OF PHYSICAL CONTROLS

• Security Systems
• Assets Protection
• Segregation of Duties
• Documentation Control
• Training and Education
IMPORTANCE OF PHYSICAL CONTROLS

• Protecting Assets
• Preventing Unauthorized Access
• Ensuring Accountability
• Promoting Operational Efficiency
• Achieving Compliance
AUTHORIZATION AND APPROVAL LIMITS

• Authorization and approval limits are internal controls that ensure

transactions are properly authorized and approved by the appropriate
personnel, preventing unauthorized actions and enhancing
accountability. These controls are crucial for maintaining the integrity
of financial records and safeguarding assets.
AUTHORIZATION:

• Specific individuals or departments are designated to approve or

authorize certain types of transactions or activities. This ensures that
only authorized personnel can initiate or execute transactions.
APPROVAL LIMITS:

• Financial thresholds or limits are set for different types of transactions,

requiring approval from higher levels of management for transactions
exceeding those limits. This prevents unauthorized spending and
ensures that larger transactions are reviewed by those with more
authority.
SEGREGATION OF DUTIES

• Internal controls often involve separating the duties of authorization,

approval, and record-keeping. This prevents a single person from
having too much control over a process and potentially concealing
errors or fraud.
EXAMPLES OF AUTHORIZATION AND APPROVAL
LIMITS
• Purchasing:
• A purchasing department may authorize the purchase of goods and services up to a certain amount, while
higher-level approvals are required for larger purchases.

• Cash Disbursements:
• Certain individuals may be authorized to process payments, but larger payments require approval from a higher-
level manager or supervisor.

• IT Access:

• Specific individuals may be authorized to access and modify IT systems, while others may be limited to specific
applications or data.
ADVANTAGES OF AUTHORIZATION AND APPROVAL
LIMITS:
• Reduced Risk of Fraud and Errors
• Improved Accountability
• Enhanced Financial Reporting Accuracy
• Increased Efficiency
SEGREGATION OF INCOMPATIBLE DUTIES

• a crucial internal control that prevents a single person from

having too much control over a process, reducing the risk of
errors, fraud, and unauthorized actions. It involves dividing
responsibilities and tasks across multiple individuals, ensuring
that no one person can both commit and conceal fraudulent
activity or errors.
KEY PRINCIPLES OF SEGREGATION OF INCOMPATIBLE
DUTIES
• Custody of Assets
• Authorization of Transactions
• Record-Keeping
• Reconciliation
• Approval of Write-offs
ADVANTAGES OF SEGREGATION OF DUTIES

• Reduced risk of fraud and errors

• Improved accountability
• Enhanced internal control
• Compliance with regulations
IMPLEMENTATION OF SEGREGATION OF DUTIES

• Identify incompatible duties

• Create a role matrix
• Enforce access controls
• Monitor and enforce
• Handle exceptions
MANAGEMENT CONTROLS
• Management control within internal control refers to the oversight
and direction that management provides to ensure the effective
functioning of an organization's internal control system. It involves
establishing policies, procedures, and processes to achieve
organizational objectives and mitigate risks. Management is
responsible for setting the tone at the top, communicating
expectations, and monitoring the effectiveness of internal
controls.
KEY ASPECTS OF
MANAGEMENT
CONTROL IN
INTERNAL
CONTROL:
MANAGEMENT CONTROL ACTIVITIES:
• Budgetary Controls: Establishing budgets and regularly comparing actual performance to
budgeted amounts to identify variances and take corrective actions.
• Performance Reviews: Evaluating employee performance against established goals and
objectives, and providing feedback and coaching to improve performance.
• Management Review Controls: Regularly reviewing and analyzing key performance
indicators (KPIs) and other financial and operational data to identify potential issues and
take corrective action.
• Internal Audit: Using internal auditors to regularly assess the effectiveness of internal
controls and provide recommendations for improvement.
• External Audit: Engaging external auditors to provide independent assurance on the
effectiveness of internal controls, often required for regulatory compliance.
SIGNIFICANCE OF MANAGEMENT CONTROL
• Achieving Organizational Objectives: Internal controls, guided by management control,
help ensure that the organization achieves its strategic, operational, and reporting
objectives.
• Mitigating Risks: Effective internal controls, managed by management, help mitigate
various risks, including financial losses, operational disruptions, and regulatory non-
compliance.
• Improving Efficiency and Effectiveness: Strong management control helps organizations
operate more efficiently and effectively, by streamlining processes and optimizing resource
allocation.
• Building Trust and Confidence: Effective internal controls, supported by strong
management control, build trust and confidence among stakeholders, including investors,
customers, and regulators.
ARITHMETIC AND ACCOUNTING CONTROLS
• Arithmetic and accounting controls are internal mechanisms
used within an organization to ensure the accuracy and
reliability of financial records and processes. They are
essentially checks and balances that verify the correctness of
calculations, transactions, and the overall accounting
process. These controls help prevent errors, fraud, and ensure
compliance with relevant regulations.
ARITHMETIC CONTROLS
• These controls focus on the accuracy of numerical calculations
within financial records. Examples include verifying totals,
reconciling accounts, and ensuring the correct application of
arithmetic operations.
ACCOUNTING CONTROLS
• These controls are broader and encompass the entire accounting
process, from initial transaction recording to the preparation of
financial statements. They include procedures for authorization, proper
record-keeping, and segregation of duties.
KEY ASPECTS OF ARITHMETIC AND ACCOUNTING
CONTROLS
• Accuracy and Reliability: These controls aim to ensure that financial records are
free from errors and accurately reflect the financial position of the organization.
• Preventing Errors: They help detect and prevent errors in calculations, data entry,
and transaction processing.
• Fraud Prevention: By verifying transactions and records, these controls can help
deter fraudulent activities.
• Compliance: They contribute to compliance with financial reporting standards and
legal requirements.
RELATIONSHIP OF ARITHMETIC AND ACCOUNTING
CONTROLS
• Arithmetic controls are a subset of accounting controls. While
accounting controls cover a wide range of activities,
arithmetic controls specifically address the accuracy of
numerical calculations within the accounting system.
ARITHMETIC AND ACCOUNTING CONTROL ACTIVITIES
• Reconciliations: Comparing bank statements with cash records, or verifying inventory counts
with accounting records.
• Trial Balances: Preparing a list of all account balances to ensure that debits and credits are
equal, verifying the arithmetical accuracy of postings in the ledger.
• Data Backups: Regularly backing up financial data to prevent data loss and maintain historical
records.
• Segregation of Duties: Assigning different responsibilities to different individuals to prevent a
single person from controlling critical financial processes
• Access Controls: Restricting access to sensitive data and physical assets to authorized
personnel.
• Standardized Documentation: Using standardized forms to record transactions and maintain
consistent record-keeping practices.
ARITHMETIC AND ACCOUNTING CONTROL ACTIVITIES
• Approving Invoices: Having multiple individuals approve invoices to prevent
fraudulent payments.
• Physical Audits: Conducting periodic physical counts of assets like inventory and cash
to verify accounting records.
• Budgetary Control: Comparing actual spending against budgeted amounts to identify
and address deviations.
• Detective Controls: Identifying errors or irregularities that have already occurred.
• Procedural Updates: Regularly reviewing and updating internal control procedures to
maintain effectiveness.
ARITHMETIC AND ACCOUNTING CONTROLS OVER
FINANCIAL DATA
• Arithmetic and accounting controls are crucial for maintaining
the accuracy and reliability of financial data. Arithmetic
controls ensure the correctness of calculations, while
accounting controls verify the proper recording and
processing of financial transactions. Both types of controls
help prevent errors, fraud, and inefficiencies, ensuring the
integrity of financial reporting.
HUMAN RESOURCE CONTROLS

• Systems and processes designed to monitor and manage

employee performance, behavior, and overall HR practices
within an organization. These controls are crucial for ensuring
that HR activities align with organizational goals, improve
efficiency, and foster a positive work environment.
 KEY ASPECTS OF HR CONTROLS:
• Performance Management: This involves evaluating employee performance against established
standards, often through performance appraisals, goal-setting, and feedback sessions.
• Disciplinary Actions: HR controls also include establishing and enforcing disciplinary policies for
addressing inappropriate behavior or performance issues.
• Training and Development: Investing in employee training and development programs is a key control
to ensure employees have the skills and knowledge necessary to succeed in their roles.
• Observation and Monitoring: HR may implement systems for observing employee behavior and
performance, particularly in areas like safety or customer service.
• Policy and Procedure Adherence: HR controls ensure that all employees are aware of and adhere to
organizational policies and procedures, including those related to conduct, ethics, and compliance.
• HR Controlling (or HR Analytics): This involves collecting and analyzing data related to HR processes
and metrics to identify areas for improvement and measure the effectiveness of HR initiatives.
 HR CONTROL ACTIVITIES
• Performance Reviews: Regular performance reviews help identify strengths and
weaknesses, set goals, and provide feedback to employees.
• Disciplinary Actions: When necessary, HR may implement disciplinary procedures to
address issues like absenteeism, tardiness, or violations of workplace rules.
• Training Programs: Providing employees with training on new software, technologies, or
workplace skills can improve their performance and productivity.
• Employee Surveys: Regular employee surveys can provide valuable insights into
employee satisfaction, engagement, and potential issues that need to be addressed.
• HR Analytics Dashboards: HR analytics dashboards can provide real-time insights into
key HR metrics, such as turnover rates, absenteeism, and training completion rates.
SIGNIFICANCE OF HR CONTROLS
• Improved Employee Performance: Effective HR controls can help employees perform at their
best by providing them with the necessary resources, training, and feedback.
• Increased Productivity and Efficiency: By ensuring that employees are engaged, motivated, and
have the skills they need, HR controls can contribute to increased productivity and efficiency
within the organization.
• Reduced Risk: HR controls help mitigate various risks, including legal risks related to
discrimination or harassment, financial risks related to high turnover or absenteeism, and
reputational risks related to unethical behavior.
• Enhanced Employee Morale and Engagement: When employees feel valued, supported, and
have a clear understanding of expectations, they are more likely to be engaged and motivated.
• Better Alignment with Organizational Goals: HR controls help ensure that HR practices are
aligned with the organization's overall goals and objectives.
END.