CAT / FIA FBT Syllabus C. Accounting And Reporting Systems, Controls - Internal control & Internal check - Notes ^{1 / 6}

Internal control

is the process designed and affected by management to provide reasonable assurance on: (Definition based on the Auditing Practices Board ‘Glossary of Terms’)

• reliability of financial reporting

• effectiveness and efficiency of operations, and

• compliance with applicable laws and regulations.

Internal check is an element of internal control, concerned with ensuring that no single task is executed from start to finish by only one person.

Each individual’s work is subject to an independent check by another person in the course of that other person’s duties.

The purpose of internal checking is to reduce the likelihood of errors and fraud.

Errors should be reduced since an employee will take more care over their work if they know it is going to be looked at by someone else.

Components of Internal Control

• the control environment

• the entity’s risk assessment process

• control activities

• the information system relevant to financial reporting

• monitoring of controls.

The term ‘internal control’ can refer to any of these five components.

The control environment is the overall attitude of management regarding internal controls and their importance.

It encompasses management’s philosophy, e.g. a commitment to integrity and ethical values, a formal organisation structure and proper training of staff.