Chapter 13

CHAPTER 13
Overview of
Internal Control
Tilar, Alexandra Nicole
Gervacio, Kyla Mae
Ugalde, Missy Louise
RISKS - PROTECTION
Definition:
Process designed and effected by those
charged with governance, management and
other personnel to provide reasonable
assurance about the achievement of the
entity's objective
INTERNAL Categories of objective:

- Reliability of the entity's financial reporting
- Effectiveness and efficiency of operations
CONTROL - Compliance with applicable laws amd

regulations
TILAR, ALEXANDRA NICOLE Purpose

- designed and implemented to address
identified business risks that threaten the
achievement of the organization's objective.
Defined as...
- all the policies and procedures adopted
by the management of an entity to assist
in achieving management's objective of
ensuring the conduct of its business,
Internal Control including adherence to management
policies, the safeguarding of assets, etc
System ....
- To achieve the objective of a business,

proper execution of business activities in
Gervacio, Kyla Mae the light of prevailing laws and socio-
economic conditions of the country
Elements of Internal
Control

UGALDE, MISSY LOUISE T.

Elements of Internal Control
• Internal control structures vary significantly from
one company to the next. However, certain elements
must be present to have a satisfactory system.
A. Control Environment;
B. Entity's Risk Assessment Process;
C. Information System;
D. Control Activities;
E. Monitoring of Controls.
A. Control Environment
• means the overall attitude, awareness, and actions of
directors and management regarding the intemal control
system and its importance in the entity.
A strong control environment can significantly complement

specific control procedures but does not ensure the
effectiveness of the internal control system.
Factors that comprises the Control Environment
1. Commmication and Enforcement of Integrity and Ethical
Values
- Essential element of the internal control environment

- Affects the design,administration,and monitoring of other components
off internal control.
- An entity's ethical and behavioral standards and the manner in
which it communicates and reinforces them determine the entity's integrity
and ethical behavior.
2. Commitment to Competence
Competence is the knowledge and skills necessary to

accomplish tasks that define an employee's job. Management
considers the competence level of its employees to determine if
they fit to perform the tasks
3. Participation by those Charged with Governance
An entity's control consciousness is influenced significantly by

those charged with governance. It is recognized in codes of
practice and other regulations or guidance produced for their
benefit.
4. Management's Philosophy and Operating Style
Refers to the management's attitude towards (a) business risk,

(b) financial reporting (c) meeting budget, profit and other
established goals which all have impact on the reliability of the
financial statements.
5. Organizational Structure
Responsibilities of any personnel in an organization includes: (a)
assist the entity in meeting its goals and objectives (b) ensure that
transactions are processed, recorded, summarized and reported
accurately.

Organizational structure provides the overall framework for

planning, directing, and controlling operations.
6. Assignment of Authority and Responsibility
Personnel within an organization need to have a clear

understanding of their responsibility and the rules and regulations
that govern their actions. Management can establish policies
regarding acceptable business practice, conflicts of interest and
code of conduct
7. Human Resources Policies and Procedures
Personnel policies should be adopted by the client to reasonably

ensure that only capable and honest people are hired and retained.
This enhances the likelihood that the client's policies and
procedures will be followed
B. Entity's Risk Assessment Process
Risk Assessment - the identification, analysis, and management of risks
pertaining to the preparation of financial statements
Risk Assessment Process - process of identifying and responding to

business risks and the result thereof.
Risks relevant to financial reporting - external and internal events that

affect an entity's ability to initiate, record, process, and report financial
data
Risks can arise or change due to circumstances such as the following:
1. Changes in Operating Environment

- changes in the regulatory or operating environment can result in changes in
competitive pressures and significantly different risks.
2. New Personnel
- New personnel may have a different focus on or understanding of internal
control.
3. New or Revamped Information System

- significant and rapid changes in information systems can change the risk
relating to internal control
4. Rapid growth
- significant and rapid expansion of operations can strain controls and
increase the risk of a breakdown in controls.
5. New technology
- incorporating new technologies into production process or
information systems may change the risk associated with internal
control.
6. New business models, products, or activities

- entering into business areas or transactions which an entity has little
experience may introduce risks associated with internal control
7. Corporate Restructuring
- restructuring may be accompanied by staff reductions and changes in
supervision and segregation of duties that may change the risk
associated with internal control
8. Expanded Foreign Operations

- the expansion or acquisition of foreign operations carries new and
often unique risk that may affect internal control
9. New accounting pronouncement

- adaption of new or changing accounting principles may affect risks in
preparing financial statements.
7. Corporate Restructuring
- restructuring may be accompanied by staff reductions and changes in
supervision and segregation of duties that may change the risk
associated with internal control
8. Expanded Foreign Operations

- the expansion or acquisition of foreign operations carries new and
often unique risk that may affect internal control
9. New accounting pronouncement

- adaption of new or changing accounting principles may affect risks in
preparing financial statements.
C. Information System, including the Business Processes, Relevant
to Financial Reporting and Communication

An information system consists of infrastructure (physical and

hardware components), software, people, procedures, and
data.
The information system relevant to financial reporting
objectives, which includes the accounting system, consists of
the procedures and records designed and established to:
Initiate, record, process, and report entity transactions....
Business processes result in the transactions that are
recorded, processed and reported by the information system.

D. Control Activities
Control activities are the policies and procedures that help ensure that
management directives are carried out. The major categories of control
procedures are:
A. Performance Review
B. Information Processing Controls
1) Proper authorization of transactions and activities
2) Segregation of duties
3) Adequate documents and records
4) Safeguards over access to assets
5) Independent checks on performance
C. Physical controls

A. Performance Review
• In a performance review management uses accounting and operating
data to assess performance, and it then takes corrective action. Such
reviews include;
- Comparing actual performance
- Investigating performance
-Reviewing functional or activity performance

• Information processing controls are policies and procedures
designed to require authorization of transactions and to ensure the
accuracy and completeness of transaction processing. Control
activities may be classified according to the scope of the system they
affect.
-General controls are control activities that prevent or detect
errors or irregularities for all accounting systems.
-Application controls are controls that pertain to the processing of
a specific type of transaction, such a payroll, or sales and collections

Control activities related to the processing of transactions may be
grouped as follows;
1. Proper authorization of transactions and activities
2. Segregation of duties
3. Adequate documents and records
4. Access to assets
5. Independent checks on performance
C. Physical Controls
Control encompass the;
physical security of assets
authorization for access to computer programs and data files
periodic counting and comparison
extent to which physical controls intended to prevent theft of
assets
E. Monitoring of Controls
- process in assessing the quality of internal control over
time.
It involves assessing the design and operations of controls on

a timely basis and take corrective actions as necessary.
End

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CHAPTER 13

INTERNAL Categories of objective:

CONTROL - Compliance with applicable laws amd

TILAR, ALEXANDRA NICOLE Purpose

UGALDE, MISSY LOUISE T.

A strong control environment can significantly complement

- Essential element of the internal control environment

Competence is the knowledge and skills necessary to

An entity's control consciousness is influenced significantly by

Refers to the management's attitude towards (a) business risk,

Organizational structure provides the overall framework for

Personnel within an organization need to have a clear

Personnel policies should be adopted by the client to reasonably

Risk Assessment Process - process of identifying and responding to

Risks relevant to financial reporting - external and internal events that

1. Changes in Operating Environment

3. New or Revamped Information System

6. New business models, products, or activities

8. Expanded Foreign Operations

9. New accounting pronouncement

8. Expanded Foreign Operations

9. New accounting pronouncement

An information system consists of infrastructure (physical and

B. Information Processing Controls

B. Information Processing Controls

It involves assessing the design and operations of controls on

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