The nature of internal control procedures

The nature of internal control procedures

Name

ACCT 2002 - Managerial Accounting: Introduction to Financial Planning and Analysis

Walden University

Internal control Defined

Ratcliffe and Landes (2009) define internal control as a process, induced by an entity’s

management, designed to provide reasonable assurance regarding the achievement of objectives

that regard effectiveness and efficiency of operations, reliability of financial reporting and

Effective internal control helps an organization achieve its objectives; it does not ensure success.

There are several reasons why internal control cannot provide absolute assurance that objectives

will be achieved: cost/benefit realities, collusion among employees, and external events beyond

an organization's control.

There are many definitions of internal control, as it affects the various constituencies

(stakeholders) of an organization in various ways and at different levels of aggregation. Under

the COSO Internal Control-Integrated Framework, a widely-used framework in not only the

United States but around the world, internal control is broadly defined as a process, effected by

an entity's board of directors, management, and other personnel, designed to provide reasonable

assurance regarding the achievement of objectives in the following categories: a) Effectiveness

2. Risk Assessment-the identification and analysis of relevant risks to the achievement of

objectives, forming a basis for how the risks should be managed

3. Information and Communication-systems or processes that support the identification,

capture, and exchange of information in a form and time frame that enable people to

carry out their responsibilities

4. Control Activities-the policies and procedures that help ensure management directives are

carried out.

5. Monitoring-processes used to assess the quality of internal control performance over

time.

(Wikipedia as at 24th October, 2011, )

The Importance of Internal Controls

profession, although in earlier texts it was considered in terms of the need for controls to be

“practical and efficient” (Irish, 1966) as cited in (Wright R 2009) and is still mentioned within

auditing texts including Arens et al. (2007). While these texts discuss the need for cost

effectiveness, no method of calculation is given. Internal controls by their nature are not just

financially orientated. Many of the controls are operational in nature.

Another reason why we need internal control is to provide accountability. Public sector managers

are responsible for managing the resources entrusted to them to carry out government programs.

Internal controls coordinate a department’s policies and procedures to safeguard its assets, check

accuracy and reliability of data, promote operational efficiency, and encourage adherence to

sound management practices.

Assurance Services in Australia, an Integrated Approach, 7th Edn., Pearson Education

control deficiencies prior to SOX-mandated audits. Journal of Accounting and

Economics 44, 166-192.

Ashbaugh-Skaife, H., Collins, D., Kinney, W., LaFond, R., 2008. The effect of SOX internal

control deficiencies and their remediation on accrual quality. The Accounting Review 83,

Ball, R., 2004. Corporate governance and financial reporting at Daimler-Benz (DaimlerChrysler)

AG: From a “Stakeholder” toward a “Shareholder Value” Model. In: Leuz, C., Pfaff, D.,

Hopwood, A., (Eds.). The Economics and Politics of Accounting. London: Oxford

University Press, 103-145.

Campbell, Mary Campbell, and Gary W. Adams (2009) Adding Significant Value with Internal

Wright R (2009) Internal Audit, Internal Control and Organizational Culture, Unpublished PhD

thesis.