“Internal Control is the process designed, implemented, and maintained by those charged with governance, management, and other personnel to provide reasonable assurance regarding the achievement of an organization’s objectives for the reliability of financial reporting, the effectiveness and efficiency of operations, the safeguarding of assets, and compliance with applicable laws and regulations.
The term “controls” refers to all aspects of one or more components of internal control” as defined in SA-315, “Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and Its Environment.” By using Internal controls, PKC Consulting can help your organization operate more efficiently by ensuring that your financial statements and reporting are accurate and timely.
Assessing Effectiveness:
A review of internal control can be accomplished through the process of examining, testing, and evaluating the system of controls established by management. This includes a complete understanding of the organization, such as
- The nature of the organization
- Accounting policies and practices of the organization
- Objectives and strategies of the organization
- Financial performance of the organization
- Relevant industry and regulatory factors.
In accordance with SA 330, “Auditor’s Responses to Assessed Risks,” The auditor performs tests of controls. An audit procedure designed to evaluate the effectiveness of controls for preventing or detecting and correcting material misstatements at the assertion level is called the Test of Controls. Representations made by management that are included in the financial statements to address various types of potential misstatements are known as Assertions.
Because an audit itself will not automatically detect all irregularities, hence PKC Consulting uses tools such as a test of control to test systemic operational controls. This, in turn, reduces the client’s risk. If the controls are effective, the control risk is low. However, if they prove to be weak or ineffective, the control risk is high. This means that the auditor must perform additional tests during the audit. The Test of Controls can be classified into four main categories:
- Interviewing: It involves asking clients to explain their control processes.
- Observation: The test may involve observing a business process or transaction as it occurs, noting all relevant control elements.
- Repeat: In this method, a new transaction is started and tracks the internal controls of management that repeat during this process.
- Inspection: During the inspection of controls, transaction documents are examined for signs of verification. Signatures, checkmarks, and stamps are signs that internal controls have been implemented.
A single control test is usually insufficient to draw conclusions, so the practice of PKC Consulting is to use all four types of Test of Controls to gain more assurance. To obtain more accurate results, an investigation should be combined with an inspection or retest.
Identification of weaknesses:
Internal Control weaknesses are identified by performing certain audit procedures. Some procedures used to identify Internal Control weaknesses by PKC Consulting are as follows,
Monitoring the controls: Detecting incidents is important. The faster you can respond to an incident, the lower the impact will be. Gather feedback from various stakeholders, talk to other departments, and continually update your audits so you can identify internal control weaknesses before they lead to a breach.
Narrative Record or Memorandum Approach: This is a complete and exhaustive description of the system. It is suitable when there is no formal internal control system, such as in small companies. Gaps in the control system are difficult to identify with the help of a memorandum.
Internal Control Questionnaire: This is the most widely used method for collecting information on the internal control system. Different people at different levels of the organization are asked questions. The questionnaire has a pre-designed format to ensure that all relevant information is collected. The questions are formulated in such a way that complete information can be obtained by answering “yes” or “no.”
Checklist: This is a set of instructions to be followed by a member of the examination staff. It must be signed and initialed by the audit assistant as evidence that the instructions have been followed. A specific statement is required for each area of weakness. The Director/Manager/Senior studies the complete checklist to identify the internal control weaknesses and assess their implementation and effectiveness.
Flowchart: This is a pictorial representation of the internal control system with its various elements, such as operations, processes, and controls, that provide the auditor with a concise and comprehensive overview of how the organization operates. A flowchart facilitates the process of evaluating internal control, as it provides a comprehensive picture of all the controls involved.
