Internal control policies for safeguarding and assurance

28/08/2021 0 By indiafreenotes

Internal control areas spread over accounting and non-accounting spheres. Internal control, as it applied to the accounting system, implies control over accounting system to achieve the following objectives:

  • Safeguarding the assets in adherence to management policy.
  • Efficient and orderly conduct of accounting transactions.
  • Prevention of error, detection of an error.
  • Ensuring accuracy, completeness, reliability, and timely preparation of accounting data.
  • Prevention of fraud, detection of fraud.

Control objectives related to the plan’s financial statement assertions should cover each of the following areas:

  • Contributions received and related receivables: An example control objective for the “existence or occurrence” assertion for contributions received would be that the control helps ensure that contributions by employers and participants meet authorized or required amounts.
  • Plan investments: An example control objective for the “valuation” assertion related to investments would be that the control helps ensure that investments are measured at fair value.
  • Benefit payments: An example control objective for the “completeness” assertion related to benefit payments would be that cash disbursement records are reconciled to ensure that all benefit payments are recorded.
  • Participant data and plan obligations: An example control objective for the “rights and obligations” assertion for plan obligations would be that the control helps ensure that the actuarial valuation of benefit obligations reflects the understanding and agreement of the plan committee or responsible officials.
  • Administrative expenses: An example control objective for the “accuracy” assertion related to administrative expenses would be that the control helps ensure that expenditures for administrative expenses are not mistakenly recorded as benefit payments.

If a good internal control system exists in the accounting system, an auditor can put greater reliance on the financial data generated in the system with a test checking of select items.

If the accounting control is not strong, the auditor may have to resort to a detailed checking of transactions, events, and practices in the accounting system.

Concerning administrative controls, the auditor may evaluate those parts of administrative controls as may have a bearing on the financial information of the entity.

For example, before certifying the valuation of stocks, the auditor may refer to the reports of consumption patterns prepared by the manufacturing segment to administration, if the auditor feels material discrepancy in the physical quantity of stocks.

Components:

Control Environment

The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure.

Numerous factors comprise the control environment in an entity, among which are the following:

  • Commitment to competence
  • Integrity and ethical values
  • Management philosophy and operating style
  • Human resource policies and practices
  • Organizational structure
  • Board of directors and audit committee
  • Assignment of authority and responsibility

Information and Communication

The information system relevant to financial reporting, objectives, which includes the accounting system, consists of the methods and records established to identify, assemble, analyze, classify, record, and report entity transactions and to maintain accountability for the related assets and liabilities.

Control Activities

Control activities are those policies and procedures that help ensure that management directives are carried out.

They help ensure that necessary actions are taken to address risks to the achievement of the entity’s objectives. Control activities have various objectives and are applied at various organizational and functional levels.

Control activities relevant to a financial statement audit may be categorized in many different ways. One way is as follows:

  • General controls
  • Information processing controls
  • Application controls
  • Documents and records
  • Proper authorization
  • Independent checks
  • Performance reviews
  • Segregation of duties
  • Physical controls

Monitoring

Monitoring is the process that assesses the quality of the internal control structure’s performance over time.

It involves assessment by appropriate personnel of the design and operation of controls on a suitably timely basis to determine that the ICS is operating as intended and that it is modified as appropriate for changes in conditions.