Internal Controls
Internal Control Definition: A process providing reasonable assurance toward:
· Efficiency and Effectiveness of Operations. A control is considered efficient when executed with minimal resources, timely, and accurately. A control is considered effective when it helps support the objectives and goals of the business.
· Reliability of Financial Reporting. Accuracy, integrity, and reliability of financial statements and accounting data.
· Compliance with Laws and Regulations
Controls can be either manual or automated
· Manual Controls–Executed by hand without a computer or other mechanization
Example: Management approval of an expense report
· Automated Controls – Embedded into the processing logic of a computerized application
Example: Dollar approval limits in the ERP system for purchasing a capital item
Controls can be either detective or preventive
· Detective Controls – Actions taken to search for and correct undesirable outcomes.
Example: Monthly bank account reconciliation
Example: Computer operations log of programmed “jobs” that abnormally ended
· Preventive Controls – Actions that function in a precautionary or deterring manner.
Example: Access Controls - - The computer will only log you on with a correct ID and password
Controls satisfy the following business objectives:
Completeness All
Transactions are processed only once
Accuracy All
Transactions are processed correctly
Validity All
Transactions are approved or authorized by appropriate person
Restrictiveness Access
to certain functions is limited to authorized people
CAVR and the Payroll Register
Completeness No
employees are missing from the payroll roster
Accuracy All
employees are paid the right amounts
Validity
Additional pay was approved by appropriate person
Restrictiveness Person reconciling payroll
register cannot process changes in pay
For example, these types of controls can be illustrated through the check writing
process you employ at home:
Manual/ Auto |
Preventive/ Detective |
CAVR | |
Use pre-numbered checks, in sequence |
M |
P |
C |
Keep carbon copy of each check written |
M |
D |
A |
Personally sign each check |
M |
P/D |
V |
Lock up checkbook, telling only a spouse where it is |
M |
P |
R |