UNDERSTANDING AND EVALUATION OF INTERNAL CONTROLS

Internal control

- Is a process, affected by an entity’s BOD, management, and other personnel designed to

provide reasonable assurance regarding the achievement of objectives relating to operations, reporting,
and compliance.

COSO (Committee of Sponsoring Organizing)

Integrated Internal Control Framework

C R I M E

CONTROL ENVIRONMENT

- Includes the attitudes, awareness, and actions of management, and those charged with the
Governance concerning the entity’s internal control and its importance.

-They SET THE TONE, this is the foundation for effective internal control, providing discipline and
structure. Which address to call them as TONE AT THE TOP

COOMPONENTS OF EFFECTIVE INTERNAL CONTROL MANAGEMENT

ICHAMPO

Integrity and ethical values- influence the effectiveness of the design, administration and monitoring
controls. If u want your employees showcase an integrity and ethical values, the management should
also portray this first towards them. Because the act will somehow give them an inspiration.

Commitment to Competence

-Managements consideration of the competence levels for particular jobs and how those levels
translate into requisite and knowledge.

- The management should inquire that outputs are in good quality, that’s why they should hire people
knowledgeable enough for the position.

Human Resource

- This involves, recruitment, orientation, training, evaluating, promoting, compensating, and

remedial actions.
- This also a needs to train the employees.
Assignment of Responsibility and Authority.

- This works on how authority and responsibility for operating activities are assigned and how
reporting relationships and authorization hierarchies are established.
- We cannot put people nga dire inline ha ira skills.

Management Philosophy and Operating Style

-Managements approach to taking and managing business risks, and managements attitudes and actions
toward financial reporting, information processing and accounting functions and personnel.

Participation by those Charge with Governance.

-independence from management, their experience and stature, the extent of their involvement and
scrutiny of act., the information they receive, the degree to which difficult questions are raised and
pursued with management and their interaction with internal and external auditors.

BOD have the power to oversee the business, but still the management oversight the business.

THOSE CHARGE BY THE GOVERNANCE RESPONSIBILITY IS TO OVERSIGHT THE OVERALL OIPERATION OF

THE BUSINESS

Organizational Structure.

- The framework within which an entity’s activities for achieving its objectives are planned,
executed, controlled and reviewed

RISK ASSESSMENT PROCESS

Process for identifying and responding to business risks and results thereof.

It includes how management identifies risks relevant to the preparation of financial statements that are
presened fairly.

This part observe by the management if they’ll reach the companys or not.

Circumstances where risk could arise.

 Changes in operating environment (REVIEW CENTERS) “everything is possible under the hit of the
sun”

New Personnel

New or revamped information systems

Rapid growth

New Technology

New business models, products, or activities

Corporate Restructurings

Expanded foreign operations

New Accounting pronouncements

USE OF IT

INFORMATION SSYTEM AND COMMUNICATION

An information System consists of infrastructure , software, people, procedures and data.

Infos. Relevant to fr objectives, wghich includes the financial reporting system, consists of the
procedures and records, established to initiate, record, process and report entity transactions and to
maintain accountability for the related ALE.

WHAT WE NEED TO SEEK IN IT: Identify and record

Describe on a timely basis the transactions

Measure the Value of Transactions

Determine the time period which transactions occurred to permit

recording oftransactions in the proper accounting period.

Present properly the Transactions and related disclosures in the fs.

Communication

- Involves providing an understanding of individual roles and responsibilities pertaining to inyernal

control over financial reporting.
- AND GOAL NATIN AY ANG INFORMATION SYSTEM NA MAY IMPACT SA FS.
MONITORING CONTROLS

Includes activities such as;

-Managements review of whether bank reconciliations are being prepared on a timely basis.

-Internal auditors evaluation of sales personnels compliance with the entity’s policies on terms of sales
contracts and

-A legal dep. Oversights of compliance with the entity’s ethical or business practice policies.

ATON CHINICHECK

Reasonable assurance involves two considerations:

1.) The Cost of the entity’s internal control should not exceed the expected benefits.
2.) Limitations exists in any entitys internal control:
internal controls tend to be directed at routine transactions rather then non-routine
transactions.
Potential for human error due to carelessness, distraction, mistakes of judgement and thee
misunderstanding of instructions.

Existing Control Activities- the policies and procedures that help ensure that management directives are
carried out, a necessary are taken to address risks that threaten the achievement of the entity’s
objectives.

EXAMPLES:

Performance review- that analyses of actual performance versus budge, forecasts and prior period
performance.

Physical Control- encompasses safeguarding of assets and controlling access to records.

Segragation of Duties- division of responsibilities, enable to reduce the opportunities to allow any
person to be in postion.

C Custody of Assets

A Authorization of Transactions

R Recording of transactions

E Execution of Transactions.
INTERNAL CONTROL ASSESSMENTS STEPS

- Identify the types of potential material misstatements

- consider factors that affect the risk of material

- Design appropriate audit procedures

There are also Procedures Obtaining Understanding

-make inquiries od appropriate company personnel

-Inspect documents and records

-Observe the company’s activities and operations

-walkthrough

AFTER UNDERSTANDING PROCEDURES. THEY WILL PROCEED TO INTERNAL CONTROL ASSESSMENT

STEPS.

2nd step Preliminary Assesment of Control Risk

There will be always be some control risk because of the inherent limitations of any accounting and
internal control.

Sa planning stage ang main goal mo dito ay, gusto mong tinganna if may control ba ang company, and if
the control is implemented by the company.

3rd step

PROCEDURES FOR PERFROMING TEST OF CONTROLS.

Inquiry -Inspection-Observation-Reperformance

4th step Reassessment of Control Risk

Consider the resukts of the tests of controls, the auditor should evaluate whether the internal
controls are designed and operating as contemplated in the preliminary assessment pf control risk.
During the Evaluation, the auditor would modify the nature, timing and extent of planned substantive
procedures.

5th step

Final Assessment of Control Risk.

U need to consider id the audit evidence is confirm. U need to check the consistency too.