INTRO TO INTERNAL CONTROL Internal Control can be defined in a broad or narrow sense/ procedures designed to minimize risk of loss

info assets! "road #iew e$uates internal control wit% management control i!e! t%e process b& w%ic% managers assure t%at resources are obtained and used effecti'el& and efficientl& in t%e accomplis%ment of organizational goals!()anagement sets t%e tone for t%e organization* Culture/En'ironment+%ow are t%ings done t%ere,,,+ Narrow #iew restrict internal control to its relations%ip to t%e accounting s&stem e'en more narrowl& to its relations%ip wit% t%ose aspects of t%e accounting s&stem t%at effect t%e financial statements! Auditors are re$uired to e'aluate internal control in t%e second standard of field work w%ic% statesA sufficient understanding of internal control structure is to be obtained to plan t%e audit and to determine t%e nature timing and e.tent of tests to be performed! /A/ 012 Internal control comprises t%e plan of organization 3 all t%e coordinate met%ods 3 measures adopted wit%in a business! 1! /afeguard its assets 4! C%eck t%e accurac&3reliabilit& of its accounting data 0! 5romote operational efficienc& 6! Encourage ad%erence to prescribed managerial polic&!

Internal control includes controls w%ic% ma& be classified as eit%er accounting or administrati'e controls! /A/ 012 I! Accounting controls comprise t%e plan of organization and all met%ods and procedures t%at are concerned wit% and relate directly to, the safeguarding of assets and the reliability of financial records. T%e& generall& include suc% controls as t%e s&stems of aut%orization and appro'al separation of duties concerned wit% record keeping and accounting reports from t%ose concerned wit% operations or asset custod& p%&sical controls o'er assets and internal auditing! II! Administrati'e controls comprise t%e plan of organization and all met%ods and procedures t%at are concerned mainl& wit% operational efficienc& and ad%erence to managerial policies and usuall& relate onl& indirectly to the financial records, i.e. performance reports, employee training programs, quality controls. (such as a gym, daycare, cafeteria) T%e independent auditor is primaril& concerned wit% t%e accounting controls ! 7undamental Control Ob8ecti'es i!e! statements of desired results or purposes to be ac%ie'ed 9ualit& of information accurate complete rele'ant timel& /ecurit& o'er Resources Compliance wit% internal and e.ternal rules 3 regulations Efficient Operations

/pecific Control Ob8ecti'es+Two primar& categories :eneral Control Ob8ecti'es + t%ose relating to t%e information ser'ices function t%e internal audit function s&stems de'elopment and maintenance s&stems operation data bases distributed data processing E;I LANs e.pert s&stems microcomputers <a'e more t%an one application t%at is affected/broader E!: password to log onto t%e computer Application Control Ob8ecti'es + t%ose relating to t%e capture input processing and output of data Transaction based+one transaction at a time E!: password to log onto :reat 5lains (specific* =T%e auditor will look at t%e general controls first and t%en at t%e application control T%e need to reduce risk+ Risk is t%e potential loss of assets or damage to t%e org! /A/ 6> impro'ements in consistenc& introduced b& computer processing ma& process large numbers of transactions incorrectl& computer must be programmed to detect errors does not %a'e t%e benefit of %uman o'ersig%t In%erent 's! Control Risk in%erent risk + t%e risk t%at t%e error or irregularit& will occur

 control risk + t%e risk t%at t%e error or irregularit& will occur and not be detected b& t%e control in place + t%e risk t%at t%e control will fail to meet its ob8ecti'e T&pes of Risks inade$uate training de'elopment and super'ision of personnel errors and irregularities in transaction aut%orization errors and irregularities in data entr& transmittal and storage s&stem failure s&stem inabilit& to meet organization and user needs e.cessi'e %ardware and software ac$uisition e.cessi'e operating and maintenance costs inefficient use of s&stem resources t%eft of assets computer abuse fradulent financial reporting concealment of illegal acts ?%o bears ultimate responsibilit& for t%e financial statements, An effecti'e accounting s&stem- (/A/ 012* 1! Identifies and records all valid transactions! 4! ;escribes transactions on a timely basis and in sufficient detail to permit proper classification of transactions for financial reporting! 0! )easures t%e 'alue of transactions in a manner t%at permits recording t%eir proper monetary value! 6! ;etermines t%e time period in w%ic% transactions occurred to permit recording of transactions in t%e proper accounting period!

@! 5resents properl& t%e results of transactions and related disclosures in financial reports!