Components of Internal Control Flashcards
COSO
The Committee of Sponsoring Organizations of the Treadway Commission
What are the 5 components of an internal control system?
control environment
risk assessment
control activities
information and communication
monitoring activities
What is “control environment” in relation to an internal control system?
Foundation of the internal control system
The collection of environmental factors that influence the effectiveness of control procedures and includes:
-philosophy and operating style of management
-personnel policies and practices of the business
-overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control
What is “risk assessment” in relation to an internal control system?
designed to identify, analyze, and manage strategic risk and business process risks
What are “strategic risks” in internal control systems?
possible threats to the organization’s success and are external to the organization
-competitors, substitute products, suppliers, customers
-political, economical, social, technological
What are “business process risks” in internal control systems?
threats to the internal processes of a company
-production, distribution, marketing, human resource
What are “control activities” in internal control systems?
policies and procedures that top management establishes to help insure that its objectives are met
What are the 5 general categories of control activities in an internal control system?
clearly defined authority and responsibility
segregation of duties
adequate documents and records
safeguards over assets and records
checks on recorded amounts
What meant by “clearly defined authority and responsibility” in regards to control activities in an internal control system?
The authority to perform important duties is delegated to specific individuals, and those individuals should be held responsible for the performance of those duties in the evaluation of their performance.
*walmart cashier
What meant by “segregation of duties” in regards to control activities in an internal control system?
accounting and administrative duties should be performed by different individuals, so that no one person has access to the asset and prepares all the documents and records for an activity
*ticket seller and ticket collector
What meant by “adequate documents and records” in regards to control activities in an internal control system?
Summary records and their underlying documentation must provide information about specific activities and help in the evaluation of individual performance
*numbered shipping documents so it’s obvious if one is missing
What meant by “safeguards over assets and records” in regards to control activities in an internal control system?
Assets and records must be secured against theft and destruction
*access controls to computers
What meant by “checks on recorded amounts” in regards to control activities in an internal control system?
Recorded amounts should be checked by an independent person to determine that amounts are correct and that they correspond to properly authorized activities. These procedures include clerical checks, reconciliations, comparisons of asset inspection reports with recorded amounts, computer-programmed controls, and management review of reports.
*taking a frame inventory
What is “information and communication” in relation to an internal control system?
An internal control system will be unable to help a company achieve its objective unless adequate information is identified and gathered on a timely basis. Further, this information must be communicated to the appropriate employees in the organization.
*mercedes with quality control issues
What is “monitoring activities” in relation to an internal control system?
the process of tracking potential and actual problems in the internal control system. Monitoring is accomplished through normal supervising activities, having internal audits, getting feedback from employees
