Internal Controls in an IT Environment

What are Internal Controls?

• It is comprised of policies, practices and procedures employed by the organization to achieve four (4) broad objectives: – To safeguard assets of the firm – To ensure the accuracy and reliability of accounting

records and information – To promote efficiency of the firm’s operations – To measure compliance with management’s

prescribed policies and procedures

Modifying Principles of Internal Control

• Management Responsibility • Methods of Data Processing • Limitations • Reasonable Assurance

Limitations of Internal Control

1. Possibility of error 2. Circumventions 3. Management Override 4. Changing conditions

PDC Model

Preventive, Detective and Corrective Controls

Preventive Controls

• First line of defense • Passive techniques designed to reduce the

frequency of occurrence of undesirable events. • Example is a well-designed data screen – only

valid entries and user-defined fields are entered.

Detective Controls

• Are devices, techniques and procedures designed to identify and expose undesirable events that elude preventive controls.

• Example – alert that the amount entered as DEBIT in the system does not equal the CREDIT entered, vice versa

Corrective Control

• The “fix.” • Example – adjusting entries to erroneous

accounts used in entering in the journal entry.

COSO INTERNAL CONTROL FRAMEWORK

What is COSO?

• Stands for “Committee of Sponsoring Organizations of the Treadway Commission.”

• Included the following organizations: – Financial Executives International (FEI) – Institute of Management Accountants (IMA) – American Accounting Association (AAA) – AICPA – IIA

THE COSO INTERNAL FRAMEWORK

The Control Environment

– Integrity and ethical values of management – Organizational structure – BOD and Audit Committee participation – Management philosophy and operating style – External influences – HR policies and practices

Risk Assessment

– Changes in operating environment – New personnel – New/re-engineered systems – Significant and rapid growth – Introduction of new product lines or activities – Organizational restructuring – Entrance to foreign markets – Adoption of new accounting principle(s)

Information and Communication

– Identify and record all valid financial information. – Provide timely information about transactions in

sufficient detail to permit proper classification and financial reporting.

– Accurately measure the financial value of transactions so their effects can be recorded in financial statements.

– Accurately record transactions in the proper time period.

Monitoring

– Process by which the quality of internal control design and operation can be assessed.

Control Activities

• Physical controls relates primarily to the human activities employed in

accounting systems. the six (6) categories of physical controls are:

Transaction authorization Segregation of duties Supervision Accounting records Access control Independent verification

• IT Controls – Application Ensures validity, completeness, and accuracy of financial

transactions. Examples include: limit checks, check digits, batch

balancing techniques.

– General Also known as General Computer Controls, Information

Technology Controls Include controls over IT governance, IT infrastructure,

security and access to operating systems and databases, application acquisition and development and program change procedures