Internal Control Systems

ISA 400: “Internal control system” means all the policies and processes (i.e., internal controls) accepted by the management of an entity to assist in attaining management’s objective of making sure, as far as feasible, the orderly and proficient conduct of its business, involving adherence to management policies, the safeguarding of property, the prevention and detection of scam and error, the correctness and totality of the accounting records, and the timely preparation of consistent financial information. The internal control system expands beyond those matters that associate directly to the functions of the accounting system and includes:

(1) “The control environment”:

That means the total attitude, awareness and actions of directors and management concerning the internal control system and its significance in the entity. The control atmosphere has an effect on the efficiency of the particular control procedures. A strong control environment, for illustration, one with tight budgetary controls and an efficient internal audit function, can considerably complement specific control procedures. Though, a strong environment does not, by itself, make sure the efficiency of the internal control system. Factors reflected in the control environment involve:

(a) The job of the board of directors and its committees.

(b) Management’s philosophy and working style.

(c) The entity’s organizational structure & techniques of allocating authority and duty.

(d) Management’s control system involving the internal audit function, personnel policies and processes and segregation of duties.
   
(2) “Control procedures”:

That means those policies and processes in addition to the control environment that management has established to attain the entity’s specific objectives. Specific control procedures involve:

• Reviewing, reporting, and approving the reconciliations.
• Checking the mathematical precision of the records.
• Controlling applications and atmosphere of computer information systems, for illustration, by establishing controls over transformation to computer programs.
• Access to data files.
• Sustaining and evaluating control accounts and trial balances.
• Approving and controlling of the documents.
• Evaluating internal data with exterior sources of information.
• Comparing the outcomes of cash, safety and inventory counts with accounting records.
• Limiting direct physical access to possessions and records.
• Comparing and examining the financial outcomes with budgeted amounts.