Topic 2
"Internal Control Concepts in the AIS"

The Fraud Triangle

Available Opportunities

Poor Ethics

Situational Pressure

Type of Fraud

Employee Fraud

  • Committed by non-management personnel
  • Usually consists of an employee taking cash or other assets for personal gain by circumventing a company's internal controls

Management Fraud

  • Perpetrated at levels of management above the one to which internal controls generally relate to
  • Frequently involves using the financial statements to create an illusion that an entity is more healthy than it actually is
  • If misappropriation of assets, it is shrouded in a maze of complex business transactions

Broad Objectives of Internal Control

To Safeguard assets of the firm

To ensure the accuracy and reliability of accounting records and information

To promote efficiency in the firm's operations

To measure compliance with management's prescribed policies and procedures

Internal control systems comprises policies, practices and procedures employed by the organisation to achieve these objectives

COSO Internal Control Framework

Control Environment
Control environment sets the overall tone of the organisation and influences the control consciousness of its management and employees in the organisation

The Integrity and Ethical values of management

The Structure of an Organisation

Role of the board of directors and audit committee

Management's philosophy and operating style

Procedures for delegating responsibility and authority

Management's methods for assessing performance

External influences

Policies and practices for managing its human resource

Risk Assessment
Risk assessment is to identify, analyse and manage risks relevant to financial reporting

Changes in external environment that impose new competitive pressures on the firm

New personnel who have inadequate understanding of internal control

Rapid growth that strain existing internal controls

Introduction of new product lines and activities which the organisation has little experience

Restructuring, downsizing or implementing new technology which affect transaction processing

Change in accounting policies that impact financial reporting

Information and Communication
The quality of information the AIS generates impacts management's ability to make correct decisions and prepare reliable financial statements

Identity and record all valid transactions

Provide timely information in appropriate detail to permit proper classification and financial reporting

Accurately measure the financial value of transactions

Accurately record transactions in the time period in which they occur

Monitoring
To assess the internal controls and functioning as intended

Through separate procedures by testing controls and then communicating control strengths and weakness to management

Through on-going monitoring by integrating special computer modules into the AIS that allow test of control to be conducted as part of routine operations


Through on-going monitoring by including management reports that identify exceptions from normal performance

Control Activities
Policies and procedures used to ensure that appropriate actions are taken to deal with the organisation's risks

IT Controls

  • Controls which relate to the computer environment

Physical Controls

  • Controls which relate primarily to human activities employed in AIS