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Look inside
SYLLABUS F
169
F INTERNAL
CONTROLS
BPP Book- Chapter 8
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MUST READ 170
Technical article
Internal audit
Risk and environmental audit
17
Focus areas 1
Internal control and audit
Role of audit committee
Role of internal auditor
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Inside internal control and audit
Overview
Internal control system
in an organization
Internal auditor
Internal control
reporting
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1 Internal control system in an organization
Internal control and audit
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Components of an internal control system
Control The overall tone or approach to internal controls set by management. It
environment basically demonstrate management commitment to establish a sound
system of internal controls
Entity risk Determining the risk associated with the company objective and how they
assessment will be mitigated
process
Information and Gathering the correct information and communicating it to correct person
communication
Control The policies and procedures in place to ensure controls operates
activities effectively
Monitoring of Checking the internal control system internally (internal audit dept.) to
controls ensure it is operating effectively
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Main objective of internal control system
1. Business activities should be conducted in an orderly and
efficient manner
2. The assets of a business need to be adequately
safeguarded
3. Fraudulent activities or material errors should be both
detected and prevented by the internal control system.
4. Accounting records must be both complete and
accurately maintained
5. Financial information must be prepared and available in
a timely fashion.
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2 Internal auditor
Internal control and audit
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Structure of the internal audit function 7
AUDIT
COMMITTEE
Monitors, directs,
delegates to and
creates
Reports to
INTERNAL
AUDIT
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Role of audit committee specific to internal 178
auditor
The audit committee should review the company’s internal
controls and ‘should monitor and review the effectiveness
of the internal audit activities.
It further specify that where there is no internal audit
function the audit committee should :
Consider annually whether there is a need for an internal audit
function
Make a recommendation to the board
Disclose reasons for the absence of such a function in the relevant
section of the annual report.
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Need for an internal audit department
1. Scale, diversity and complexity of the company’s
operations
2. Number of employees
3. Changes in organizational structure
4. Changes in key risks
5. Problems with internal control systems
6. Cost-benefit considerations
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3 Internal control reporting
Internal control and audit
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SOX section :404 reporting on internal controls
The Sarbanes Oxley s:404 is mandatory for listed company
Sarbanes-Oxley Act section 404 requires management
and the external auditor to publish a statement for external
usage that reports on the adequacy of the company's
internal control over financial reporting.
This is the most costly aspect of the legislation for
companies to implement, as documenting and testing
important financial manual and automated controls
requires enormous effort.
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Management statement on internal control
The requirement is that a company's published annual report should
include an internal control report of management that contains:
(1) A statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting for
the company.
(2) A statement of the framework used by management to conduct
the required evaluation of the effectiveness of the company's
internal control over financial reporting.
(3) Management's assessment of the effectiveness of the company's
internal control over financial reporting as of the end of the
company's most recent fiscal year, including a statement as to
whether or not the company's internal control over financial
reporting is effective.
(4) A statement that the audit firm has issued an attestation report on
management's assessment of the company's internal control over
financial reporting
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