CHAPTER 8: INTRODUCTION TO INTERNAL 3.

Participation by TCW
CONTROL 4. Management’s Philosophy and Operating Style
5. Organizational Structure
Nature and Purpose of Internal Control 6. Assignment of Authority and Responsibility
Internal Control - process designed and effected by 7. Human Resources Policies and Procedures
those charged with governance, management, and
other personnel to provide reasonable assurance about Entity’s Risk Assessment Processes
the achievement of the entity’s objectives. is the identification, analysis, and management of risks
pertaining to the preparation of financial statements.
Four Key Concepts of Internal Control
1. A process Sources of Risks
2. Effected by those charged with governance and ● Changes in operating environment
management ● New personnel
3. Provide reasonable assurance ● New or revamped information system
4. Achievement of entity’s objectives ● Rapid growth
● New technology
OBJECTIVES OF INTERNAL CONTROL ● New business models, products or activities
▪ Financial reporting objective ● Corporate restructuring
ensures that financial information is. accurate, reliable, ● Expanded Foreign operations
and prepared according to [Link] of ● New Accounting pronouncements
Internal Control
Information System
▪ Operational objective consists of infrastructure (physical and hardware
promotes efficient and effective operations to support components), software, people, procedures and data.
the achievement of. organizational goalsObjectives of
Internal Control Methods and Records in Information Systems
1. Identify and record all valid transactions
▪ Compliance objective 2. Describe on a timely basis the transactions in
ensures the organization follows applicable laws, sufficient detail to permit proper classification of
regulations, and internal policies. transactions for financial reporting
3. Measure the value of transactions in a manner
Components of Internal Control (CRIME) that permits recording their proper monetary
• Control activities value in the financial statements
• Entity’s Risk assessment process
• Information system Methods and Records in Information System
• Monitoring controls 4. Determine the time period in which trend.
• The Control Environment transactions occur to permit recording of
transactions in the proper accounting period
Control Environment 5. Present properly the transactions and related.
overall attitude, awareness, and actions of directors and disclosures in the financial statement
management regarding the internal control system and
its importance in the entity
Control Activities- are the policies and procedures that
Subcomponents of Control Environment help ensure that management directives are carried out
1. Communication and enforcement of integrity and
ethical values Major Categories of Control Procedures
2. Commitment to competence 1. Performance Review
2. Information Processing Controls
▪ Proper Authorization of transactions
▪ Segregation of Duties
▪ Adequate documents and records
▪ Safeguards over access to assets
▪ Independent checks performance
3. Physical Controls

Monitoring Controls
a process that an entity uses to assess the quality of
internal control overtime

Internal Control Monitoring Process

▪ Evaluating the design and operation of. internal control
▪ Communicating information about strengths. and
weaknesses
▪ Recommendation of actions to improve internal control

Types of Internal Controls

1. Preventive Controls - measures designed to stop
errors or fraud before they occur.
2. Detective Controls- measures that identify errors or
fraud after they have occurred
3. Corrective Controls- measures that fix problems
that have already occurred and prevent them from
happening again

Internal Control System

An internal control system is a set of policies,
procedures, and processes implemented by an.
organization to ensure its operations are efficient,
assets are safeguarded, financial information is
accurate, and laws and regulations are complied witH
Components- parts or pieces that make up a whole Example: Alam ng clerk kung kanino magre-report at sino
Internal Control- mga ways ng company para siguraduhin natama, nag-aapprove ng expenses.
safe, at maayos ang operations at financial reporting.

-mga bahagi ng sistema na tumutulong sa company para Assignment of Authority and Responsibility
maayos, safe, at accurate ang operations at financial – Sino ang may power to approve, sign, decide. (roles)
reporting.” Example: Only the manager can approve purchases above
- building blocks that make up an internal control system in ₱10,000.
a company.
HR Policies and Procedures
Components of Internal Control (dapat gawin or guide ng comp pra – Hiring, training, performance evaluation.
same at maayos ang operation. Example: Background check bago i-hire para safe.
CRIME stands for:
C – Control Activities ENTITY’S RISK ASSESSMENT PROCESS
R – Risk Assessment Process Ito yung paraan ng company para ma-identify, analyze, at
I – Information System ma-manage ang risks na pwedeng maka-apekto sa financial
M – Monitoring Controls statements.
E – Control Environment Layman’s example:
“may bagong system? Baka magka-error.”
Control Environment Bagong Cashier o Bagong Accountant
- kung may pake ba ang higher ups sa internal control, ano Risk: Baka magkamali sa encoding or cash handling kasi baguhan.
ungattitude nila doon Assessment: Company provides training and close supervision
> Attitude ng Leader: kung seryoso ba sila sa pagsunod ng rules, during first weeks.
so kung they follow the law very very, ganon din ang
magigingthinking ng employees Sources of Risks (with examples):
>Awareness: alam ba nila kung gaano ka-importante ang internal Changes in operating environment
control, like naintindihan nila na kailangan ng controls para iwas Example: Pandemic → kailangan mag-adjust ang business process.
fraud, errors, at problems
> Actions: Ano ang ginagawa ng management, ex. gumagawang New personnel
clear olicy, at mga parusa sa mali Example: New cashier → prone sa errors.
Ex. If the boss ignores errors, accepts under-the-table deals, or
doesn’t care about documentation → weak control environment. New or revamped information system (new system sa pag
pro-process, pagre-record, pagfre-report)
Subcomponents: Example: Lumipat sa new POS system → possible glitches.
Integrity and Ethical Values
– Morals ng company. Rapid growth
Example: May policy na “No gifts from suppliers” para iwasbribery. Example: Too many branches → harder to control operations.

Commitment to Competence New technology

– Hire people na may proper skills. Example: Automated machines → risk of technical failure.
Example: Hindi ka magha-hire ng accountant na walang alam
sabookkeeping. New business models/products
Example: Nag-add ng online selling → may new risks like fraud.
Participation by TCWG (Those Charged With Governance)
– Board of Directors supervising the company. (paanonakikialam o Corporate restructuring
nago-oversee ang higher ups para siguraduhin ang maayos na Example: Reassign staff → confusion sa responsibilities.
control ng operation
Example: Board checking if the managers do their job properly. Expanded foreign operations
Example: Currency conversion errors sa accounting.
Management’s Philosophy and Operating Style
– Style ng management: strict? relaxed? risky? New accounting standards
Example: Kung laging nagmamadali sa reporting, possible may Example: Need mag-adjust ng financial reporting format.
errors.
INFORMATION SYSTEM
Organizational Structure Ito yung system na ginagamit ng company para mag-record,
– Clear hierarchy and reporting lines. (alam ng bawat isa ang roles mag-store, at mag-process ng transactions.
at structure) Kasama dito: hardware, software, people, procedures, data.
Example:
The company uses QuickBooks to record sales, expenses, and Example: Auditor checks if cash count matches sales report. and
[Link] and Records (Taglish explanations + examples) inventory checks

Identify valid transactions 3. Physical Controls

– Siguraduhin na legit ang bawat entry. – Physical protection.
Example: Sales lang na actual naganap ang dapat ma-record. Example: CCTV, locks, ID system.

Describe transactions in detail

– Kailangan kumpleto ang info.
Example: Sa OR, may date, customer, amount, purpose.
MONITORING CONTROLS
Measure value properly Process ng pagtse-check kung effective pa ba ang internal controls
– Tama ang amount. over time.
Example: Record sales as ₱1,000 not ₱100. Example:
Internal audit checking if employees still follow company rules.
Record in the correct time period
– Dapat tama ang cut-off. > Monitoring Process (Taglish + examples)
Example: Sales ng December, hindi dapat mapunta sa January. 1. Evaluate design and operation
Tingnan kung maayos at effective ang internal controls at kung
Present properly in FS paano sila nag-ooperate sa actual situation.
– Organized and correct presentation. Examples:
Example: Sales under revenue, not under expenses. Tinitignan kung effective pa ba ang password policies sa IT system.
Check kung segregation of duties ay nasusunod sa accounting.
CONTROL ACTIVITIES
Ito yung specific actions or procedures para siguraduhin 2. Communicate strengths and weaknesses
nanasusunod ang rules. I-report ang maganda at hindi maganda sa internal control system
Example: para malaman ng management.
Need ng approval bago mag-purchase ng supplies. Examples:
IT reports that firewalls are strong but password rules are weak.
1. Performance Review “Sales reports are accurate, but inventory tracking has gaps.
– Checking performance/results.
Example: Manager reviewing weekly sales reports. 3. Recommend Improvements
Meaning: Magbigay ng solusyon o recommendation para mas
2. Information Processing Controls mapabuti ang controls.
– Controls sa IT systems. Examples:
Example: System requires password bago makapag-encode ng ● Suggest stronger passwords or multi-factor authentication
sales. for IT security.
> Proper Authorization ● Recommend additional training for new employees.
– Kailangan ng approval. ● Advise new approval steps for big purchases to avoid
Example: Only supervisor can approve refunds. fraud.

> Segregation of Duties

– Hiwalay dapat ang roles para iwas fraud.
Example:
Cashier = receives cash
Accountant = records
Auditor = checks

> Adequate Documents and Records

– Complete and clear documentation.
Example: Every purchase must have an official receipt.

> Safeguards over access to assets

– Protecting company properties.
Example: Cash kept in a locked drawer.

> Independent Checks

– Someone else re-checks the work.