Control environment and control activities.

Day II

Session III and IV

Session Overview

• Internal control is designed to provide reasonable assurance that the entity’s general objectives are being achieved.

• Therefore clear objectives are prerequisite for an effective internal control process.

• Internal control consist of five interrelated components.

Components of Internal Control

• Control environment

• Risk assessment

• Control activities

• Information and Communication.

• Monitoring

Components to be discussed

• During this session Control environment and control activities will be discussed.

• Control environment provides the discipline and structure as well as the climate which influences the overall quality of internal control.

• It has overall influences on how strategy and objective are established and control activities are structured.

• This helps in assessment of risk faced by the entity

Mitigating the risk.

• Internal control activities helps mitigating risk.• Control activities can be preventive and/or

detective.• Control actions are necessary complement to

internal control activities in order to achieve objectives. Control activities and corrective actions should provide value for money.

• Their cost should not exceed the benefit resulting from them. (Cost effectiveness)

Controlling operations on entity

• Effective information and communication is vital for an entity to run and control its operations.

• Entity managements need access to relevant, complete, reliable, correct and timely communication related to internal as well as external events.

• Information is needed through out the entity to achieve this objective.

Importance of Internal control

• IC is dynamic process, required to be adopted continuously.

• Monitoring of internal control system is necessary to help ensure that internal control remains tuned to the changed objectives, environment, resources and risk.

Relationship of objectives and components.

• There is direct relationship between general objective and internal control components

• Four general objectives (1) accountability (and reporting) (2) Compliance (with laws and regulations) (3) Orderly (ethical, efficient, economical and effective) (4) Operations and safeguarding resources.These are represented by the vertical columns

Internal control framework

• It is relevant and applicable to all entity’s, the manner which management applies it will vary widely with the nature of the entity and depends on a number of entity-specific factors.

• Factors include the organizational structures, risk profile, size, complexity, operating environment, activities regulation.

Learning objectives

• Participants will understand two important components of internal control

• (1) Control environment

• (2) Control activities.

Control environment.

• It sets the tone of an organization, influencing the control consciousness of its staff

• It is foundation for all other components of internal control.

• Its provide discipline and structure.

Elements of control environment

• Personnel and professional integrity and ethical values of management and staff.

• Supportive attitude toward internal control at all times.

• Commitment of competence.

• The “ tone at the top” (Management’s philosophy and operating style)

Continued..

• Organization structure

• Human resource policies and practices.

The personal and professional integrity and ethical values of management and staff

• It determines their preferences and value judgement and translated in to standards of behaviour.

• All should exhibit a supportive attitude toward internal control at all times through out the organization

• All should maintain and demonstrate personal and professional integrity and ethical values

Continued..

• Managers and employees has to comply with the applicable codes of conduct at all times. I.e. disclosure of personal financial interest, outside position and gift and reporting conflicts of interest.

• Public organization should make visible to the public, integrity and ethical values.

• Behaviour of staff should be consistent with mission.

Commitment to competence

• includes the level of knowledge and skill needed to help effective performance

• includes good understanding of individual responsibilities with respect to internal control.

• Managers and employees are to maintain a level of competence that allows them to understand the importance of developing and maintaining good internal control and to perform their duties in order to accomplish the general I.c objectives.

Continued…

• Every one should be involve in internal control with his own specific responsibilities.

• Managers and staff must therefore maintain and demonstrate a level of skill necessary to assess risk and help ensure effective and efficient performance.

Tone at the Top

• Management’s philosophy and operating style reflects:

• a supportive attitude toward internal control at all times, independence, competence and leading by example;

• a code of conduct set out by management, and counseling performance appraisals that supports the internal control objectives and that of ethical operations.

Continued..

• The attitude established by top management is reflected in all aspects of management’s actions. The commitment, the involvement and support of top government officials and legislators in setting “the tone of the top” foster a positive attitude and are critical to maintaining a positive and supportive attitude towards internal control in organisation.

Continued..

• If the top management believes that internal control is important, others in organization will sense that and will respond by conscientiously observing the control established.

• If organization feel’s that control is not important, it is certain that the organisation’s control objectives will not be achieved.

• Demonstration of insistence on ethical conduct by management is of vital importance.

Continued..

• Management should set a good example through its own actions and its conduct should reflect what is proper rather than what is acceptable or expedient. The integrity of managers and their staff is however, influenced by many elements. Overall performance appraisals should be based on an assessment of many critical factors, including the employees role in effecting internal control

Organizational structure

• The organizational structure of an entity provides:

• Assignment of authority and responsibility• Empowerment and accountability• Appropriate lines of reporting• The organizational structure defines the

entity’s key areas of authority and responsibility.

Continued

• Empowerment and accountability relate to the manner in which this authority and responsibility are delegated through out the organization.

• There can be no empowerment or accountability without form of reporting. Therefore appropriate form of reporting need to be defined

Continued..

• In some cases other lines of reporting have to be possible in addition to the normal one, such as in cases where management is involved in irregularities.

• The organizational structure can include an internal audit unit that should be independent from management, and report directly to the highest level of authority within the organization.

Human resource policies and practices

• It includes..

• Hiring and staffing

• Orientation

• Training (formal and on job)and education

• Evaluating and counseling

• Promoting and compensating and remedial actions.

Continued..

• An important aspect of internal control is personnel.

• Competent, trustworthy personnel are necessary to provide effective control.

• The methods by which persons are hired, trained, evaluated, compensated and promoted are an important part of the control environment.

Continued…

• Hiring and staffing decisions should thertefore include assurance that individuals have the integrity and the proper education and experience to carry out their jobs and that necessary formal, on the job, and ethics training is provided. Managers and employees, who have a good understanding of internal control and are willing to take responsibility, are vital to effective control.

Continued..

• Human resource management also has an essential role in promoting an ethical environment by developing professionalism and enforcing transparency in daily practice Ths becomes visible in recruitment, performance appraisal and promotion processes, which should be based on merits. Securing the openness of selection process by publishing both the recruitment rules and vacabt positions also helps to realize ethical human resource management.

Control Activities

• Control activities are policies and procedure established to address risk and to achieve the entity’s objectives.

• To be effective, control activities must be appropriate, at all levels and in all functions. They include a range of detective and preventive control activities as diverse.

Detective and preventive control activities.

• Authorization and approval procedure

• Segregation of duties (authorizing, processing, recording, reviewing)

• Control over access to resources and records

• Verifications

• Reconciliation

Continued

• Reviews of operating performance• Reviews of operations, processes and

activities• Supervision (assigning reviewing and

approving, guidance and training.)• Entities should reach an adequate balance

between detectiuve and preventive control activities.

Continued..

• Corrective actions are necessary complement to control activities in order to achieve the objective.

• Control activities are the policies and procedures established and executed to address risks and to achieve the entity’s objective.

Effective control activity

• To be effective, control activities need to be • 1) To appropriate ( right control in the right place and

commensurate to the risk involved)• 2) Function consistently according to plan through out the

period (that is, be complied with carefully by all employees involved and not by passed whn key personnel are away or the work load is heavy)

• 3) Be cost effective (that is, the cost of implementing the control should not exceed the benefits derived)

• 4) Be comprehensive, reasonable and directly relate to control objectives.