Page 123 - DCOM204_AUDITING_THEORY

Unit 7: Internal Control

7.1 Internal Control Notes

Internal control is the process designed to ensure reliable financial reporting, effective and
efficient operations, and compliance with applicable laws and regulations. Safeguarding assets
against theft and unauthorized use, acquisition, or disposal is also part of internal control.
Internal Control defined as a process designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. Compliance with applicable laws and regulations

Several key points should be made about this definition:
Internal control is, to some degree, everyone’s responsibility. For example Within the University,
administrative employees at the department-level are primarily responsible for internal control
in their departments.

Notes People at every level of an organization affect internal control.
Effective internal control is a built-in part of the management process (i.e., plan, organize,
direct, and control). Internal control keeps an organization on course toward its objectives and
the achievement of its mission, and minimizes surprises along the way. Internal control promotes
effectiveness and efficiency of operations, reduces the risk of asset loss, and helps to ensure
compliance with laws and regulations. Internal control also ensures the reliability of financial
reporting (i.e., all transactions are recorded and that all recorded transactions are real, properly
valued, recorded on a timely basis, properly classified, and correctly summarized and posted).

Notes Effective internal control helps an organization achieve its operations, financial
reporting, and compliance objectives.
Effective internal control helps an organization achieve its objectives; it does not ensure success.
There are several reasons why internal control cannot provide absolute assurance that objectives
will be achieved: cost/benefit realities, collusion among employees, and external events beyond
an organization’s control.

!
Caution Internal control can provide only reasonable assurance – not absolute assurance –
regarding the achievement of an organization’s objectives.
7.2 Internal Control Process

Internal control consists of five inter-related components as follows:
1. Control (or Operating) environment
2. Risk assessment

3. Control activities

LOVELY PROFESSIONAL UNIVERSITY 117