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INTERNAL CONTROLS

INTERNAL CONTROLS. 2/2/2012 – Mt. Laurel 2/7/2012 – Rockaway 2/9/2012 – Robbinsville . Internal Control Guide. State of New Jersey Office of the State Comptroller A. Matthew Boxer, State Comptroller November 2011 Report of Fraud Toll Free Hotline 1-866-OSC-TIPS Link

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INTERNAL CONTROLS

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  1. INTERNAL CONTROLS 2/2/2012 – Mt. Laurel 2/7/2012 – Rockaway 2/9/2012 – Robbinsville

  2. Internal Control Guide • State of New Jersey • Office of the State Comptroller • A. Matthew Boxer, State Comptroller • November 2011 • Report of Fraud Toll Free Hotline 1-866-OSC-TIPS • Link • http://www.nj.gov/comptroller/doc/internal_control_guide_nov_2011.pdf

  3. Management of Organization Four Basic Functions • Planning • Organizing • Leading • Controlling

  4. Effective Management Allows Managers to: • Delegate responsibilities to staff • Have comfort that expectations will be realized

  5. What is Internal Control COSO (Committee of Sponsoring Organizations) A process…designed to provide reasonable assurance regarding the achievement of objectives in the following categories: • Effectiveness and efficiency of operations • Reliability of financial and management data • Compliance with applicable laws and regulations • Safeguard resources against loss

  6. Internal Control System • Integral part of managing any organization • To meet goals and objectives system includes: • Plans • Methods • Procedures • First line of Defense in safeguarding assets • Preventing and detecting errors and fraud

  7. IMPORTANCE • Keeps organization on course • Protects organization by catching small mistakes • Protects organization by mitigating opportunities for innocent mistakes or internal fraud • Impacts organization’s people, processes, and physical structure

  8. Fundamental Concepts • Internal Controls will change with organizational changes • Degree of control employed is a business judgment • Cost should not exceed benefit derived

  9. Fundamental Concepts • Considerations of Weaknesses • Increase supervision • Institute additional or compensating controls • Accept the risk inherent with the control weakness

  10. Fundamental Concepts • Organizational Self Regulation • Affects every aspect including staff, processes and operations • Integrated into day-to-day operations and responsibilities • Incorporates the qualities of good management • Depends upon people • Must make sense within each unique environment

  11. LIMITATIONS • Human errors and poor judgments • Controls can be circumvented by collusion • Management can intentionally override controls • Excess costs can prevent management from implementing ideal controls • More controls are not always better • Balance between risk and controls • Proactive • Value-added • Cost effective • Decrease exposure

  12. Design Considerations • Organizational size • Organizational structure • Nature of business operations • Diversity and complexity of operations • Method of transmitting, processing, maintaining and accessing information • Applicable legal and regulatory requirements ONE SIZE DOES NOT FIT ALL!

  13. FRAMEWORK COMPOENENTS • Control Environment • Risk Assessment • Control Activities • Information & Communication • Monitoring

  14. Control Environment • Integrity and Ethical Values • Commitment to Competence • Organizational Structure • Organizational Structure • Delegation of Authority and Responsibility • Relationship with Oversight Agencies • Human Resources Policies and procedures

  15. Risk Assessment • Risk Identification • Change in operating cycle • New employees • New or enhanced technology systems • New programs • New and revised laws and regulations • Questions to Ask • What could go wrong • What is worst case scenario • What would cause us to fail • What areas are we most vulnerable • What assets do we need to safeguard

  16. Risk Assessment • Methods • Periodic management conferences • Executive round tables • Forecasting • Strategic planning • Consideration of findings from audits • Other assessments • Risk Management • Accept the risk and not institute further controls • Share the risk • Reduce the risk by instituting controls • Avoid the risk by avoiding the function

  17. Control Activities – Specific Policies and Procedures • Security Assets • Segregation of Duties • Authorization of Activities • Approval, Verification and Reconciliation • Adequate Documentation • Information Processing • Independent Performance Review

  18. Security Assets • Unique user IDs and passwords • Physical security of tangible and intangible assets • Backup for computer records and programs – secure offsite facility • Disaster recovery plans • Performing periodic unannounced verifications

  19. Segregation of Duties • Prevent one person from performing incompatible duties • Require responsibility for operations be separate from related record-keeping • Ensure three functions of authorizing, recording, and maintaining assets are separate

  20. Authorization of Activities • Define parameters • Execution of transactions • Requirement of signature • Appropriate monetary thresholds • Documentation requirements adhered to

  21. Approval, Verification and Reconciliation • Identify activities or transactions that require supervisory approval • Require supervisory approval to ensure transaction has been validated and conforms • Prior to transaction review all supporting documentation

  22. Adequate Documentation • Concise and clear • Implementation of storage and retention policies • Documents periodically verified to ensure accountability and compliance

  23. Information Processing • Access within the computing environment controlled by unique user passwords • Change passwords on a periodic basis • Restrict Access

  24. Independent Performance Review • Periodic reconciliations performed • Comparison of different sets of data to identify differences • Implement necessary corrective actions • Management review of reports, statements, reconciliations • Comparison of information about current performance

  25. INFORMATION COMMUNICATION Relevant Reliable Timely

  26. Information and Communication • Written policies and procedures • Mission statements, goals and objectives • Organization charts • Job descriptions and performance evaluations • Training materials • Period reports measuring progress towards goals • Internal/external audit report • Financial reports

  27. Types of Communication • Performance and management systems • Information systems • Policy and procedure manuals • Management directives • Memos and e-mails • Internet and intranet • Speeches and briefings

  28. Characteristics of Effective Communication • Relevant information on operational performance • Current, accurate, complete and timely • Shared with appropriate staff at right time • Management receptive to employee recommendations • Appropriate channels

  29. MONITORING Assessment of Internal Control performance over time Self Assessments Peer Reviews Internal Audits

  30. Monitoring should focus on: • Control Activities • Mission • Control Environment • Communication • Risk and Opportunities

  31. Fraud Awareness Common Anti-fraud measures Three elements Present when Fraud Occurs Types of Fraud Examples

  32. Common Anti-Fraud Measures • External Audits • Internal Audits • Fraud Training • Surprise Audits • Establishment of hotline

  33. Three Elements Present • Opportunity • Caused by ability to circumvent internal controls or internal control weaknesses • Motive • Pressure or perceived pressure – financial • Greed • Revenge • Thrill Seeking • Rationalization • Excuse or perceived validation for action

  34. Types of Fraud • Management Fraud • Top management’s manipulation of financial statements • Employee Fraud • Embezzlement of assets • Vendor • Overcharging for goods • Shipping inferior goods • Not shipping goods but billed and payment received

  35. Examples of Fraud • Theft or misappropriation of assets • Fictitious revenues or disbursements • Check tampering • Fictitious refunds • Fictitious vendor or employee payments • False statements • False Overtime • Forgery or alteration of documents • Invoice Kickbacks • Bid Rigging • Unauthorized use of records • Falsification of Reports • Conflicts of interest • Inaccurate employment records • Authorizing or receiving compensation for hours not worked • Incurring obligation in excess of appropriate authority • Willful violation of laws, regulations, policies or contractual obligations

  36. Indicators of Fraud • Unsupported or unauthorized transactions • Missing or altered documents • Inconsistent, vague, or implausible responses • Denial of access to records • Unusual delays in providing requested information • Numerous complaints • Significant transactions involving related-parties • Inadequate or absent internal controls • Analytical anomalies • Unexplained inventory shortages • Purchases in excess of needs • Excessive voided transactions • Cash shortages • A CRITICAL COMPONENT IS PROPER EDUCATION OF EMPLOYEES CONCERING FRAUD AWARENESS • THE PERCEPTION OF THE POSSIBILITY OF DETECTION IS THE BIGGEST DETERENT

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