Internal Control andControl Self Assessment

Presented by CA Manoj AgarwalMay 18, 2016, IIA Bombay Chapter

Disclaimer

• All the contents of the presentation constitute the opinion of the speaker, and the speaker alone; they do not represent the views and opinions of the speaker’s employers, supervisors, nor do they represent the view of organizations, businesses or institutions the speaker is, or has been a part of.

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Agenda

• Internal Control

• Control Self Assessment

• Case Study

• Q&A

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DefinitionsInternal Auditing definition states the fundamental purpose, nature, and scope of internal auditing.

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes

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Internal control is defined by COSO (www.coso.org) as follows:

Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Internal ControlOn paraphrasing definition of Internal control, we get:

1. Geared to the achievement of objectives in one or more separate but overlapping categories

2. A process consisting of ongoing tasks and activities—it is a means to an end, not an end in itself.

3. Effected by people - it is not merely about policy and procedure manuals, systems, and forms, but about people and the actions they take at every level of an organization to effect internal control.

4. Able to provide reasonable assurance, not absolute assurance, to an entity’s senior management and board of directors.

5. Adaptable to the entity structure - flexible in application for the entire entity or for a particular subsidiary, division, operating unit, or business process

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COSO Internal Control Framework• Objectives of Internal Control

– Operational Objectives - Effectiveness and efficiency of operations

– Reporting Objective - Reliability of reporting

– Compliance Objectives - Compliance with applicable laws and regulations

• Process

– Policies (Management Statement what should be done)

– Procedures (Actions that implement policies)

• Process is managed through Planning, Executing (doing), Checking, amending (Planning Do Check Act)

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PDCA 5 Components of Internal Control

Plan Control Environment

Risk Assessment

Do Control Activities

Check Information &Communication

Act Monitoring Activities

Principles of Internal Controls

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Principles of Internal Controls-1Components PrinciplesControl environment

1. The organization demonstrates a commitment to integrity and ethical values.

2. The board of directors demonstrates independence of management and exercises oversight for the development and performance of internal control

3. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives.

4. The Organization demonstrates a commitment to attract, develop, and retain competent individual in alignment with objectives.

5. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.

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Principles of Internal Controls-2Components PrinciplesRisk Assessment

6. The organization specifies objectives with sufficient clarity to enable identification and assessment of risks relating to objectives

7. The organization identifies risks to achievement of its objectives across the entity and analyses risks as a basis for determining how the risks should be managed.

8. The organization considers the potential of fraud in assessing risks to achievement of objectives.

9. The organization identifies and assesses changes that could significantly impact the system of internal control.

Control Activities

10.Select and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.

11.Select and develops general control activities over technology to support the achievement of objectives.

12.Deploy control activities as manifested in policies that establish what is expected and in relevant procedures to effect the policies.

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Principles of Internal Controls-3Components PrinciplesInformation and Communication

13.The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control

14.The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of other component of internal control.

15.The organization communicates to external parties regarding matters affecting the functioning of other components of internal control

Monitoring Activities

16.The organization selects, develops and performs ongoing and/or separate evaluations to ascertain whether the components of internal controls are present and functioning.

17.The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

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Principle Evaluation Template..1

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Principle Evaluation Template — Control Environnent

Control Environment Principles Summary of Controls

Deficiencies/Notes/Other Considerations(also record deficiencies in log below)

1. Demonstrates Commitment to Integrity and Ethical Values—The organization demonstrates a commitment to integrity and ethical values.

Sets the Tone at the Top—How do the board of directors and management at all levelsof the entity demonstrate through their directives, actions, and behavior the importanceof integrity and ethical values to support the functioning of the system of internalcontrol?

Establishes Standards of Conduct—How are the expectations of the board of directorsand senior management concerning integrity and ethical values defined in the entity’sstandards of conduct and understood at all levels of the organization and by outsourcedservice providers and business partners?

Evaluates Adherence to Standards of Conduct— What processes are in place to evaluatethe performance of individuals and teams against the entity’s expected standards ofconduct?

Addresses Deviations in a Timely Manner—How are deviations of the entity’s expectedstandards of conduct identified and remedied in a timely and consistent manner?

(Other entity specific points of focus, if any)

Principle Evaluation Template..2

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Principle Evaluation Template — Control EnvironnentDeficiencies Applicable to the Principle

Identification No.

Internal control deficiency description

Possible Impact onPrinciple

Evaluate preliminary deficiency severity:(Consider whether other controls to effect this principle compensate for the internal control deficiency.)

List internal controldeficiencies related toanother principle thatmay impact this internalcontrol deficiency

Present?(Y/N)

Functioning?(Y/N)

Preliminary Severity—Is internal control deficiency a major deficiency? (Y/N)

Comments/ CompensatingControls

Evaluate deficiencies within the principle:*Evaluate if any internal control deficiencies or combination of internal control deficiencies, when considered within the principle, represent a major deficiency.**<Update Summary of Deficiencies Template as required>

<Explanation>

Evaluate the principle using judgment.** Y/N Explanation/Conclusion

Is the principle present?

Is the principle functioning?

* Note: Record deficiencies in Summary of Deficiencies Template.** If it is determined that there is a major deficiency, then management must conclude that the component is not present and functioning and the overall system of internal control is not effective.

Controls ObjectivesObjectives Input Process Output

Authorization Is the source authorized? Are the procedures approved? What was approved?

Recording Is it accurate and

complete?

Is it timely?

Is it documented?

Who does it?

When?

Are procedures followed?

Is it recoverable?

Is management review adequate?

Is it accurate and complete?

Is there an audit trail?

Is management review adequate?

Does it balance?

Safeguarding/

Security

Who should control?

Are duties separated?

Who can access it?

Are duties separated?

Is it confidential?

Who should have it?

Verification Are sources proper? Are procedures followed complete?

Are investigation and review of

differences adequate?

Are differences properly

resolved?

Is management review adequate?

Existence/

Placement

Do policies and

procedures define the

adequate level of

controls?

Are there procedures to create a

control?

Are controls adequate?

Are controls placed in the most

efficient part of the process?

Is the residual risk acceptable

according to the company's risk

tolerance?

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Controls Objectives-Payroll - 1Objectives Input Questions to be asked

Authorization Is the source authorized? Is the persons sending the inputs for payroll are authorized

Recording Is it accurate and

complete?

Is person sends the correct and Complete Inputs?

Is it timely? Is inputs are send in a timely manner to ensure processing happens as per plan?

Is it documented? Is there is evidence that inputs have been actually received from person specified?

Safeguarding/

Security

Who should control? Who should receive the inputs?

Are duties separated? Is the person receiving the inputs is the person who process the payroll?

Verification Are sources proper? How does we know that the person has actually taken information from correct source?

Existence/

Placement

Do policies and

procedures define the

adequate level of

controls?

Does all this is documented? Does the responsibility has been documented?

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Controls Objectives – Payroll -2Objectives Process Question to be asked

Authorization Are the procedures approved? Is the process / method to process payroll is approved?

Recording Who does it? Does it can be established who has actually performed which job?

When? Is there any audit trail which can establish that procedures are actually followed?

Are procedures followed?Is it recoverable?

Is it repeatable?

Is management review adequate? Does some one has review the processing and is there an evidence which can confirm that review has been actually been performed?

Safeguarding/

Security

Who can access it? Who can access the location/ system/ office processing the information?

Are duties separated? Is there SOD in place?

Verification Are procedures followed complete?

Who verify that the process has been actually been followed?

Are investigation and review of differences adequate?

In case of any exception has been observed , then whether the same has been taken to its logical conclusion and the same is documented.

Existence/

Placement

Are there procedures to create a control?

Is someone is responsible to ensure that process has been actually completed as specified?

Are controls adequate? Is any controls have been put in place to ensure that process is happening as specified?Are these adequate?

Are controls placed in the most efficient part of the process?

Is control has been put in place to ensure optimum cost and benefit?

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Controls Objectives – Payroll - 3Objectives Output Question to be asked

Authorization What was approved? Is there an evidence that output of the process is authorized and

accountability of person authorizing can be established?

Recording Is it accurate and

complete?

How is it ensures that output is accurate and complete?

Is there an audit trail? Is there an audit trail of process of ensuring the completeness of output?

Is management review

adequate?

Is there adequate management review?

Does it balance? Does output matches with input to ensure that output is proper?

Safeguarding/

Security

Is it confidential?

Who should have it?

Is there any guideline defined regarding who should have access the output and to what extent?

Verification Are differences properly

resolved?

Is management review

adequate?

In case of any differences observed in management review or a question raised in review, the same has been resolved properly with audit trail?

Existence/

Placement

Is the residual risk

acceptable according to

the company's risk

tolerance?

What is the risk observed and not (insured/controlled) and is that acceptable to company? Is there any document evidencing acceptance?

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Control Types• Preventative Controls: are installed to stop

undesirable outcomes before they can occur. These types of controls are typically the most cost-effective controls because they avoid the cost of correction. E.g.

• Detective Controls: are necessary to measure the effectiveness of the preventive controls. While some errors cannot be effectively controlled through preventative controls, they must be detected as they occur. E.g.

• Corrective Controls: are necessary, for they correct the identified deficiency and therefore deter it from occurring again. Documentation and reporting systems are developed to identify undesirable outcomes and keep problems under management’s purview until they can be solved or the defect can be corrected.

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• Segregation of duties to prevent intentional wrongdoing,

• Proper authorization to prevent improper use of organizational resources,

• Adequate documentation and records to deter improper transactions,

• Physical control over assets to prevent their improper conversion or use.

• Reviews and comparisons of records,

• Independent check on performance,

• Bank reconciliations, confirmation of bank balances, cash counts,

• Computerized techniques such as transaction limits and passwords.

Ref: Marks on Governance (http://normanmarks.wordpress.com/) http://www.theiia.org/blogs/marks/index.cfm?postid=396

What is CSA?

Control Self Assessment• A set of techniques used to assess risk, control strength,

and control weaknesses utilizing a control framework.The 'self' refers to the involvement of management and staff in the assessment process often facilitated by internal auditors

• to analyze, within a chosen control framework, the obstacles and strengths which affect their ability to achieve their key business objectives, and

• to decide upon appropriate action.

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CSA Rationale• Responsibility for controlling risk belongs to management and

all employees

• People are the most important control factor

• Most employees are honest, competent, and want their organization to succeed

• People are far more likely to embrace needed changes if they are involved in the assessment process

• Helps employees understand control

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When do you want to use CSA?• New work processes/projects• New organizations

– to identify the risk exposures and required controls

• Reorganizations• Management / Employee turnover

– to identify where risks are – to create understanding for business objectives– to assess how risks are changing– to put emphasis on highest priority

risks and controls

• Processes that cross over into other work groups– to get to the root cause of problems– helps bring groups together– participants learn how their activities interrelate– collaborative problem solving

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CSA - GOALS & OBJECTIVES• Provide a forum for participants (stakeholders) to:

– Conduct an assessment of risks and controls.

– Develop recommendations for improvement.

– Enhance their ability to achieve objectives.

– Increase communication with the Unit.

– Improve the efficiency and effectiveness of operations.

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Benefits of CSA• Honest feedback on control environment communication and

monitoring

• Ability to discuss and explore areas of concern to determine reasons and root causes of concern

• Ability to obtain an understanding of the degree of concern among participants

• Development of recommendations by employees in the Unit

• Buy-in/Ownership of Recommendations

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COSO Framework - Control Components

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CONTROL ENVIRONMENT

RISK ASSESSMENT

CONTROL ACTIVITIES

MONITORING

Traditional

Auditing/TestingCSA

Case Study

• Multinational Organisation

• Control Catalogue (from Risk Register)

• Control Categories

• Use of Excel Template

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Case Study

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The following are guidelines to help complete the self assessment:

Is control relevant? There may be situations where a control is not relevant to a business unit. If this is the

case, answer no and provide explanation in the comment field.

Is control Implemented? Answer Yes if the control is in place and operational.

Is control under

implementation?

Answer Yes if the control is under implementation but not yet fully operational.

Is a plan for

implementation prepared?

Answer Yes if implementation is not yet commenced but a plan has been developed for

implementation.

Is the design of the control

documented?

Answer Yes if you have a description of the control in place (written procedure, process

flowchart, etc). The description needs to be sufficiently detailed to continue operating the

control if you need to change resources.

Is evidence retained? Answer Yes if you retain evidence that control has been performed.

The following boxes should be completed if the Maturity level for the control is not 5:

Gap Analysis / Comment Document the gap analysis (e.g. determining and documenting the variance between the

control requirements and current control in place)

Implementation Plan Document what actions need to be taken to close the gap identified as part of the gap

analysis (e.g. what needs to be done to obtain a level 5 maturity)

Deadline When the control is expected to be at a level 5 maturity

The following box should be completed if the Maturity level for the control is 5:

Assurance What monitoring processes are in place to give management confidence that the control

has been implemented? Is the monitoring process documented? What is done if non-

compliance is found?

Case Study

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My Blogs and Posts

1. Audit Client Categories

2. Role of Internal Audit

3. Value addition by internal audit

4. Revenue Assurance

5. Companies Act 2013 and Control Catalogues

6. Internal Controls in eCommerce Companies

7. How to create Internal Control Framework for your company

8. Creating An Internal Audit Plan

9. Governance for Approval Matrix

10. Right to Audit

11. Have you included vendor audit as part of your audit plan?

Manoj Agarwal

manojbagarwal@gmail.com

9820392252

Linkedin: https://in.linkedin.com/in/manojbagarwal