internal control and control self assessment
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Internal Control andControl Self Assessment
Presented by CA Manoj AgarwalDecember 30, 2012, Thane CPE Study Circle of WIRC, ICAI
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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
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.
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Internal ControlOn paraphrasing definition of Internal control, we get:1. Geared to the achievement of objectives in one or more separate but
overlapping categories2. 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)
PDCA 5 Components of Internal Control
Plan Control Environment
Risk Assessment
Do Control Activities
Check Information &Communication
Act Monitoring Activities
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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..1Principle 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 levels of the entity demonstrate through their directives, actions, and behavior the importance of integrity and ethical values to support the functioning of the system of internal control?
Establishes Standards of Conduct—How are the expectations of the board of directors and senior management concerning integrity and ethical values defined in the entity’s standards of conduct and understood at all levels of the organization and by outsourced service providers and business partners?
Evaluates Adherence to Standards of Conduct— What processes are in place to evaluate the performance of individuals and teams against the entity’s expected standards of conduct?
Addresses Deviations in a Timely Manner—How are deviations of the entity’s expected standards of conduct identified and remedied in a timely and consistent manner?
(Other entity specific points of focus, if any)
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Principle Evaluation Template..2Principle Evaluation Template — Control EnvironnentDeficiencies Applicable to the PrincipleIdentification 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/ConclusionIs 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.
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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.
• 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
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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
INFO
RM
ATIO
NCO
MM
UNICATIO
N
CONTROL ENVIRONMENT
RISK ASSESSMENT
CONTROL ACTIVITIES
MONITORING
TraditionalAuditing/Testing
CSA
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Case Study
Case Study
