Internal controls are defined broadly as the measures an organization takes to protect life and property. Ranging from physical security and access controls to rules of conduct and procedure, internal controls do not guarantee elimination of the risk of errors or fraud. The main goal of internal control systems is to reduce the risk to an acceptable level. This benchmark often is referred to as a reasonable assurance or expectation that business transactions are reported accurately and honestly.
In their wake, the Sarbanes-Oxley Act of was enacted to protect investors from fraudulent accounting activities and improve the accuracy and reliability of corporate disclosures. This has had a profound effect on corporate governanceby making managers responsible for financial reporting and creating an audit trail.
Managers found guilty of not properly establishing and managing internal controls face serious criminal penalties. Operational Efficiency No two systems of internal controls are identical, but many core philosophies regarding financial integrity and accounting practices have become standard management practice.
While internal controls can be expensive, properly implemented internal controls can help streamline operations and increase operational efficiency, in addition to preventing fraud. Detective Controls Internal controls are typically comprised of control activities such as authorization, documentation, reconciliation, security and the separation of duties.
And they are broadly divided into preventative and detective activities. Preventive control activities aim to deter the errors or fraud from happening in the first place, and include thorough documentation and authorization practices.
And the separation of duties ensures that no single individual is in a position to authorize, record and be in custody of a financial transaction and the resulting asset.
Authorization of invoices and verification of expenses are internal controls. In addition, preventative internal controls include limiting physical access to equipment, inventory, cash and other assets.
Detective controls are backup procedures that are designed to catch items or events that have been missed by the first line of defense. Here the most important activity is reconciliationused to compare data sets, and corrective action is taken upon material differences.
Other detective controls include external audits from accounting firms and internal audits of assets such as inventory. Limitations of Internal Controls Regardless of the policies and procedures established by an organization, only reasonable assurance may be provided that internal controls are effective and financial information is correct.
The effectiveness of internal controls is limited by human judgment.
A business will often give high-level personnel the ability to override internal controls for operational efficiency reasons, and internal controls can be circumvented through collusion.How to implement IFC and who all need to be involved? The “Three Lines of Defense” model provides a simple and effective way to enhance communications on Internal Financial Controls by.
The course also provides useful indicators and checklists such as indicators of financial crime, the ACFE's fraud prevention checkup, internal control assessment form, computer applications checklist, and financial reporting information systems and controls checklist.
This course is most beneficial to professionals new to internal control and fraud detection who may be staff or entry level but also for experienced professionals with limited exposure to these topics.
Fraud Risk Checklist: A Guide for Assessing the Risk of Internal Fraud Gary A. Rubin Director of Finance Accretive Health, Inc. the source for financial solutions. Non-inline references. Srivastava R.P. & Shafer G.R. () " Belief function Formula for audit risk " Review: Accounting Review, Vol.
67 n° 2, pp. –, for evidence theory applied on audit risk.
Lesage ()" Evaluation du risque d'audit: proposition d'un modele linguistique " Review: Comptabilite, Controle, Audit, Tome 5, Vol. 2, September , pp.
–, for fuzzy audit risk. Effect of Internal Control on Fraud Detection and Prevention in District Treasuries of Kakamega County Oguda Ndege Joseph 1 Odhiambo Albert2 Prof John Byaruhanga3 1. (School of business and economics Masinde Muliro University of .