Internal control over Financial reporting : An IS
control perspective
CA ANAND PRAKASH JANGID
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Agenda
•
Check in
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Financial Reporting & Regulation
•
Understanding Internal Control
•
IS Controls & Internal controls
•
Summary
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What is common among them????
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3
Financial Reporting &
Regulation
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Effects
Goodwill?
Public
Trust?
Belief?
Jobs
Penalties
Money
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Causes
Greed
Inefficient
Internal
Controls
Loopholes
Lack of
Guidance
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Key Audit standards and IS controls
SA 300 - Planning an Audit of Financial Statements
SA 315- Identifying and assessing the risk of material misstatement through understanding the entity
and its environment
SA 402 - Audit considerations relating to an entity using a service organization
SA
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SA 300
The effect of information technology on the audit procedures, including the availability of data and the
expected use of computer assisted audit techniques.
Evidence of management’s commitment to the design, implementation and maintenance of sound
internal control, including evidence of appropriate documentation of such internal control.
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SA 315 : Para A50
•
Controls in IT systems consist of a combination of automated controls (for example, controls
embedded in computer programs) and manual controls.
•
Further, manual controls may be independent of IT, may use information produced by IT, or may be
limited to monitoring the effective functioning of IT and of automated controls, and to handling
exceptions.
•
When IT is used to initiate, record, process or report transactions, or other financial data for
inclusion in financial statements, the systems and programs may include controls related to the
corresponding assertions for material accounts or may be critical to the effective functioning of
manual controls that depend on IT.
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SA 315 : Para 52
Information Technology also poses specific risks to an entity’s internal control, including, for example :
 Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both.
 Unauthorized access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorized or nonexistent
 Transactions, or inaccurate recording of transactions. Particular risks may arise where multiple
users access a common database.
 The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties.
 Unauthorized changes to data in master files.
 Unauthorized changes to systems or programs.
 Failure to make necessary changes to systems or programs.
 Inappropriate manual intervention.
 Potential loss of data or inability to access data as required.
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SA 402
Para 3: “ Services provided by a service organization are relevant to the audit of a user entity’s
financial statements when those services, and the controls over them, are part of the user entity’s
information system, including related business processes, relevant to financial reporting”
Para 5 : Information available on general controls and computer systems controls relevant to the
client's applications
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SA 265 - COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE
CHARGED WITH GOVERNANCE AND MANAGEMENT
Duties of Auditor
• To find significant deficiencies in the IC system.
• Impact on F/S after performing Risk Assessment
Procedures (SA 315).
• Obtaining Written Representations from Management (SA
580) and communication.
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SA 315 - IDENTIFYING AND ASSESSING THE RISK OF MATERIAL
MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS
ENVIRONMENT
Auditor’s Role
• Obtain Understanding of the Internal Control System.
• Perform Risk Assessment Procedures.
• Categorization of Risks.
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SA 330 - THE AUDITOR’S RESPONSES TO ASSESSED RISKS
Auditor’s Role
• Classifying assessed risks as inherent or controllable
• Design Responses to assessed risks
• Communicate to Management (SA 265)
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IS Controls and CARO
Para 34 of SA 400
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Clause 49 – CEO-CFO Certification
The CEO and the CFO certify that they:
•
•
•
accept the responsibility for establishing and maintaining internal controls;
have evaluated the effectiveness of internal control systems
have disclosed to the Auditors and the Audit Committee:
–
–
•
deficiencies in internal controls (in design & operation) and
remediation steps (taken or proposed to be taken)
They have indicated to the Auditors and Audit Committee significant changes in internal control
during the year
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Understanding Internal
Controls
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Internal Controls
Internal control is defined as a process affected by an
organization's structure, work and authority flows, people and
management information systems, designed to help the
organization accomplish specific goals or objectives.
It means policies framed by the management in order to have
stronger and adequate control within the organization which
can be checked by the internal auditor in order to ensure that
the goals and objectives are duly met.
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Components of Internal Controls
Control
Environment
Risk
Assessment
Information and
Communication
Control
Activities
Monitoring
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Equation of Internal Control
General
Financial
Controls
Internal
Controls
IS
Controls
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IS Controls
IS
Controls
Application
Controls
IT General
Controls
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Objective of IS Controls
Maintaining Confidentiality
Preserving Integrity
Ensuring Availability
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Applications Controls
•
Application software is the software that processes business transactions.
•
The application software could be a payroll system, a retail banking system, an inventory system, a
billing system or, possibly, an integrated ERP.
•
It is the application software that understands data with reference to their business context. The
rules pertaining to the business processes are implemented in the application software.
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Examples of Applications
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General Ledger
•
Fixed Assets
•
Inventory Control
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Enterprise Resource Planning
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Human Resources
•
And, everyone’s favorite – Payroll…
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Types of Application Controls
Output
Controls
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Examples for Application controls
Input Controls
• Data checks and
validations
• Automated authorization,
approval, and override
• Automated SOD
Processing Controls
• Automated file identification
and validation
• Automated functionality
and calculations
• Audit trails and overrides
• Data extraction, filtering,
and reporting
• Interface balancing
• Automated functionality
and aging
• Duplicate checks
Output Controls
• General ledger and subledger posting
• Update authorization
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Examples for Application Controls
Integrity Controls
• Data encryption, which locks data by cipher
• Data backup, which stores a copy of data in
an alternate location
• Access controls, including assignment of
read/write privileges
• Input validation, to prevent incorrect data
entry
• Data validation, to certify uncorrupted
transmission
Management Trail
• Systems Control Audit Review File and
Embedded Audit Modules (SCARF/EAM)
• Snapshots
• Audit hooks
• Integrated Test Facility
• Continuous and Intermittent Simulation
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General Controls
IT general controls (ITGC) are controls that apply to all systems components, processes, and data
for a given organization or information technology (IT) environment. The objectives of ITGCs are to
ensure the proper development and implementation of applications, as well as the integrity of
programs, data files, and computer operations.
ITGCs may also be referred to as General Computer Controls which are defined as: Controls, other
than application controls, which relate to the environment within which computer-based application
systems are developed, maintained and operated, and which are therefore applicable to all
applications.
These are policies and procedures that relate to many applications and support the effective
functioning of application controls by helping to ensure the continued proper operation of information
systems.
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Types of IT General Controls
Data center
physical security
controls.
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Key areas which needs attention
Logical Access
• Grant of access
• Revocation of Access
SDLC
• Documentation of
Requirements
• Integration testing and UAT
• Training to end users
Change Management
• Source Code versioning
• Rollback Plan
• Release Management
• Archival of older versions
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Key areas which needs attention
Data Center and Physical
Access
• Physical Locks and Bio
metric locks
• Data Center Environment
• Security Personnel
Backup and Recovery
• Backup Procedures
• Recovery Procedures
• Application data and
environment
• Backup Tapes
End User
• Acceptable Usage
• Password Policy
• Ticket Management
• Logs and Review
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Key areas which needs attention – IS Security
Antivirus
• Server
• Computers
• Network
Firewall
• Servers
• Computers
Wireless Network
• Encryption
• MAC Filter
Computers
• Patch Updates
• Virus Definition Updates
• Automatic Log out and screen lock
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Summary
With the advent of IT in every sphere of business it have been evident that we Chartered Accountants
need to rise and seize this opportunity.
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Check out
When are these opportunities??
Half our life is spent trying to find something to do with the time we have rushed through life trying to
save.
Will Rogers
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Questions???
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Thank You
CA ANAND PRAKASH JANGID
+91 9620233516
anand@quadrisk.com
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