Internal Contols Flashcards
(14 cards)
What is an Internal Control System / Internal Controls?
The structures, policies and procedures that a Company has in place to manage its business risks (financial, operational, & compliance risks)
What are the three types of Internal Controls?
- Preventative - to prevent an adverse risk from happening
- Detective - for detecting risks for when they occur
- Corrective - dealing with risk events when they occur and their consequences
What must an internal control system be to be effective?
A control system must be well designed to achieve their purpose and applied properly in practice
What is the role of Internal Audit?
Key purpose of internal audit function is to evaluate and improve the effectiveness of a company’s internal controls and risk management system
What are the benefits of an in-house internal audit team?
The team would understand the organisation, its culture, operations and risk profile; and can be properly integrated into the business and be an ongoing checks and balances
What are the disadvantages of using an in-house internal audit?
Using an in-house team can be less cost effective for a smaller company, and they may not have the resources, experiences and skills that an external professional organisation might have. It may be harder for an in-house team to remain independent and may find it difficult to critique management
What are the three types of business risks?
Financial, operational, compliance risk
What is the consequences of a poor internal control system
If an internal control system is weak because they are not properly designed or applied wrong then they may prevent risk events from occurring.
What is a preventative control?
Intend to prevent an adverse risk from occurring (e.g, segreagation of duties relating to financial transactions preventing fraud by employee & limit to extent of human error)
What is detective controls?
For detecting risk when they occur so that the appropriate people are alerted and corrective action can be taken (e.g., internal audits)
What are corrective controls
For dealing with risks that have occurred and their consequences (e.g., disciplinary action policies, and DRPs)
What are the benefits of internal controls?
- Reliability of financial reporting
- Effectiveness and efficiency of operations
- Compliance with applicable laws and regulations
What is an internal control risk?
The risk that the system will fail to achieve their intended purposes and will fail to prevent, detect, or correct adverse risks
Why might a internal control system fail?
- It is badly designed,
- It is well designed but not applied properly due to human error, oversight, or deliberately ignoring,
- Circumvention of the control
