Overview of Internal Control
LEARNING
OBJECTIVES
 Understand the nature and purpose of
internal control
 Define the internal control system
 Explain the elements of internal control
INTERNAL
CONTROL
DEFINITION
 A process for assuring achievements of an
organization’s objectives in operational
effectiveness and efficiency, reliable financial
reporting, and compliance with laws, regulations
and policies.
Designed and implemented to address identified
business risk that threaten the achievement of
any of these objectives.

INTERNAL
CONTROL SYSTEM
DEFINITION
 Means policies and procedures ( internal controls)
adopted by management of an entity to assist in
achieving management’s objectives of ensuring
,as far as practicable , the orderly and efficiency
of the business
 It provide direction that will increase efficiency
and strengthen adherence to policies.

INTERNAL
CONTROL
COSO ( Committee of Sponsoring Organization) , as
a voluntary private sector initiative to sponsor the
National commission of Fraudulent Financial
Reporting. It has published two key reports laying
down guidelines on the design of the internal
control system. The COSO report views internal
control as a process designed to provide reasonable
assurance regarding the achievements of three core
objectives:
Objectives
1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. compliance with laws and regulations

Elements of
Internal
Control
Elements of Internal Control
Control Environment
Risk Assessment
Information System &
Business Process
Control Activities
Monitoring of Controls
Communication and
Enforcement of
Integrity and Ethical
Values
Commitment to
Competence
Participation to those
Charged with
Governance
Management’s
Philosophy and
Operating Style
Organizational
Structure
Assignment of Authority
and Responsibility
Human Resource
Policies and
Procedures
Company wide
objectives
consist of
Infrastructure ,
software, people
procedures and data
Policies and
procedures that help
ensure management
directives are carried
out.
Assessment of the
quality of internal
control over time
Process level
objectives
Risk identification and
Analysis
Managing change
Relevant to financial
reporting objectives
which includes
accounting systems
Performance review
Information Processing
control
Quality of Information
Physical control
Effectiveness of
communication
On going monitoring
Risk Assessment
Process
Process in Risk Management
1. Risk identification- risk that may influence the achievements of
the company objectives and the success of the company
strategies are pinpointed.
2. Risk Assessment – identified the risks that makes it possible to
affects the impact of different risk factors on performance.
Evaluation includes the probability of occurrence associated with
risk factors.
3. Risk response- following the identification and assessment of the
risk, management must act in order to implement risk
management policies.

Types of Internal Control
Definition
Examples
Preventive Controls
Designed to discourage errors or
irregularities from occurring
Segregation of duties
Approval, Authorization and
Verification
Security of Assets
Detective Controls
Find errors or irregularities after they
have occurred
Review Performance
Reconciliation
Corrective Controls
Target the correction of errors or
irregularities as soon as they are
detected
Job rotation
Quality improvement
https://www.brainkart.com/article/Kinds-of-Internal-Control_37585/
Limitations of Internal Control
1. Judgement- Decisions must be made constrained by available time,
information at hand and under pressure of getting a job done
2. Breakdowns- Employee’s may misunderstand instructions
3. Management override- High level personnel may be able to overrule
controls for personal gain or advantage
4. Collusion- two or more individuals may work together to bypass control.
Control Activities- are the policies and procedures that help
ensures the management activities
Performance Review
Physical Control
Management uses accounting and operating data to
assess performance and then take corrective action
Controls that encompass the physical security of asset,
the authorization for access to computer programs and
data files, and periodic counting and comparison.
• comparing actual performance vs budget
• Investigating performance indicators on operating or
financial data
• Reviewing functional or activity performance
Example: employee ID cards, fences, cash registers, fire
proof files and locks
Computer related controls dealing with access privileges
or established backup recovery procedures
Control Activities- are the policies and procedures that help
ensures the management activities
Information Processing Control- Are policies and procedures designed to require authorization of transactions and to
ensure the accuracy and completeness of transaction processing.
Control Procedures
Examples
Proper authorization of transaction activities
• example: List price approval, disposal of asset,
expenses authorization, credit line approval
Segregation of duties- requires that different individuals be
assigned responsibility for different elements of related
activities particularly those involving authorization, custody,
or recordkeeping.
• the same person who is responsible for an asset's
recordkeeping should not be responsible for
physical control of that asset.
• One person orders good from suppliers and another
person logs in the receiving goods
Adequate documents and controls- use of adequate
documents and records allow to obtain reasonable
assurance that all valid transactions have been recorded
•
•
•
•
Prenumbered :
Official receipt
Sales invoice
Purchase order
Control Activities- are the policies and procedures that help
ensures the management activities
Information Processing Control- Are policies and procedures designed to require authorization of transactions and to
ensure the accuracy and completeness of transaction processing.
Control Procedures
Examples
Access to Assets- establishment of physical barriers and
appropriate policies
• Inventories be kept in storeroom or warehouse
• Instruments may be placed in a safe deposit box
• Policies on the access to company resources and
information
Independent check performance- periodic counts of assets
and comparing the counts to the balances in the general
ledger account
• Count of inventory vs inventory ledger
• Bank reconciliation
For each of the following , give an example of physical control the client can use to protect the asset or record
Account
Physical control
Petty Cash
Should be kept in locked in a fireproof safe
Cash received by retail clerks
Cash received by retail clerks should be entered into a cash register to record all
cash received.
Accounts receivable records
Accounts receivable records should be stored in a locked, fireproof safe. If the
records are computerized, adequate backup copies should be maintained and
access to the master files should be restricted via passwords
Raw material Inventory
Raw material inventory should be retained in a locked storeroom with a reliable and
employee controlling access.
Perishable tools
Perishable tools should be stored in a locked storeroom under control of a reliable
employee.
Manufacturing equipment
should be kept in an area protected by burglar alarms and fire alarms and kept
locked when not in use
Marketable securities
Marketable securities should be stored in a safety deposit vault.
Case Study:
The smallest branch of Super Fresh Cosmetics in Iloilo employs Mary Santos, the branch
manager, and her sales assistant, Jane Reyes. The branch uses as bank account in Iloilo
city to Pay expenses. The account is kept in the name of Super Fresh Cosmetics- Special
account”. To pay expenses, checks must be signed by Mary Santos or by the treasurer of
Super Fresh Cosmetics , Juan Dy. Mary receives the cancelled checks and bank
statements. She reconciles the branch account herself and files cancelled checks and
bank statements in her records. She also periodically prepares reports of cash
disbursements and send them to the home office.
Required:
1. List the weaknesses in internal control.
2. For each weakness, state the type of misstatements that is likely to result
3. How would you improve internal control
Case Study:
Role Identification: Mary Santos
1. Branch Manager
2. She is the signatory of the check
3. She receives the cancelled checks and bank statement
4. She do the reconciliation
5. She prepares the cash disbursement reports
Weakness
Misstatements that is likely to occur
Recommendation to improve the
internal control
No segregation of duties
• Mary Santos is the signatory and
do the reporting
• The bank statement and cancelled
check is reconciled by the manager
, where reconciliation should be
made against the manger’s report
of cash disbursement
The manager may draw checks to
herself for personal purpose and omit
them from her list of cash
disbursement of or inflate other
reported disbursement amounts
Have all cancelled checks and bank
statement directly to the home office.
Cash disbursement with all supporting
documents should be submitted to the
Head office and reconcile. Bank
reconciliation should be done by the
HO.
ANNOUCEMENT
 Synchronous class next week, May 28
 Case Study Presentation
 Worldcom Scandal
 Siemens
 Short quiz :
 Coverage: Chapter 13&14
 Assignment: Individual Activity: Deadline:
May 29th
Activity: Internal Control Assessment
Research and identify internal controls that are being implemented in the following business establishments. Give 3
each per establishments.
1. Department Store
2. Bank
3. Convenience store
4. Supermarket
Internal