Chapter 4

1. Chapter 4 Internal controls

2. Outline • Objectives • Definition of internal control • Internal control purposes • Risk exposures • COSO frameworks • Examples

3. Definition of internal control four common elements: • Process • Reasonable assurance • In a few areas • Involves people

4. Internal control purposes • Safeguard assets • Reliability of financial statements • Operating efficiency • Compliance

5. Operational risk Systems risk Human error risk Financial risk Market risk: Credit risk Liquidity risk: Hazard risks Strategic risks Legal and regulatory risk Business strategy risk: Risk exposures – Brown’s Taxonomy

6. COSO • The Committee of Sponsoring Organizations • Treadway Commission • Frameworks • internal control (1985) • enterprise risk management (2004).

7. COSO frameworks Internal Control: Integrated Framework • Control environment • Risk assessment • Control activities • Information and communication • Monitoring

8. COSO frameworks Enterprise Risk Management: Integrated Framework • Internal environment • Objective setting: organizational goals • Event identification:

9. COSO frameworks Enterprise Risk Management: Integrated Framework • Risk assessment: likelihood and impact • Risk response: generic ways to deal with risk • Control activities: specific procedures for responding to risk

10. COSO frameworks Enterprise Risk Management: Integrated Framework • Information and communication: • Monitoring

11. Adequate documentation Background checks Back-up computer files Back-up power supplies Bank reconciliation Batch control totals Data encryption Document matching Edit checks Internal Control Examples

12. Firewalls Insurance and bonding Internal audits Limit checks Lockbox systems Physical security Preformatted data entry screens Prenumbered documents Restrictive endorsements of checks Internal ControlExamples

13. Internal Control Examples • Daily deposit of cash receipts • Segregation of duties • User training