Definition of Internal Control as per SSA 315
Internal controls are the methods adopted by the organization to safeguard the assets, assuring the integrity of the financial and accounting information. It also ensures that organization meets operational and profitability targets. Through use of proper internal controls, management policies can easily be communicated and had immediate impact on the performance of the company. In this case report, internal control in respect to SSA 315, will be discuss in detail through laying emphases on the advantages and limitations of the internal controls on the various organization. Some real examples will be provides to define the internal control in various organizations.
This Singapore Auditing Standard has separately defined the internal control in detail and as per this standard internal is must for every organization. SSA 315 is related with the auditor’s responsibility to find out any material misstatement in the financial statements and analyze them. According to this standard, the internal controls should be properly implemented by the management so that they are effective to provide all the details that the auditors require for identifying the material misstatement. The standard of SSA 315 defines the internal control as the process that is designed, executed and uphold by the persons who posses the responsibility with maintaining the governance, management and other respective works. The adoption of the respective standard provides the reasonable assurance that entity will achieve the desired goals in regards to the reliability of the financial reporting and other matter of concerns. Internal controls also assure the effectiveness and efficiency of the operations and also help the management to be able to comply with the existing laws and regulations (Singapore standard on Auditing, 2013).
The businesses around the world are largely emphasizing on the use of internal controls for managing the risks and thus safeguarding their assets. The major issue faced by the organizations in this context is ensuring the effectiveness of the internal controls. As per ISA 315 (REVISED) (2017), the International Auditing and Assurance Board (IAASB) have developed International Standard on Auditing (ISA) for the purpose of improving the quality of auditing. The ISA 315 has been developed in this content to improvise the external auditing functions through analysis of the internal auditing functions. As such, the standard aims to improve the external reporting practices through gaining knowledge from internal auditors who have better understanding of the internal control of an organization. As such, it is important for the auditor’s to obtain an understanding of the internal control components for identifying the potential misstatements (ISA 315 (REVISED), 2017). The effectiveness of the internal controls can be predicted through assessing its major components that are as follows:
- Control Environment: The development of a controlled environment within an organization depends on the presence of factors such as ethical values, competency, quality leadership style and ways of assigning authority and responsibility by the management.
- Risk Assessment Process: The auditors should analyze the risk identification policies and procedures of an entity for identifying its effectiveness for reducing the business risks (Leitch, 2016).
- Information System: The auditors should also assess the information system that includes the business activities necessary for the financial reporting and communication. This should include an analysis of the information system efficiency to record the events and conditions for development of financial statements, the financial reporting procedures and its communication process for interacting with regulatory authorities ( Rusu and Viscusi, 2017).
- Control Activities: The auditors should also possess knowledge of the control activities used by an organization such as adequate control over business transactions, continual performance assessment, physical control over assets, proper assigning of roles of responsibilities and presence of standard policies for carrying out business functions.
- Monitoring of Controls: It is also necessary for the auditors to develop an understanding of the activities used by an organization for monitoring the internal controls and the actions used by it for improvising over its controls (ISA 315 (REVISED), 2017).
As per the information extracted from Microsoft Corporation (2012), the businesses around the world are increasingly adopting the use of computer related technologies and tools for performing their daily operational activities efficiently and quickly. Thus, it is highly required for business at present to adopt the use of internal control as they become highly exposed to computer related frauds and therefore these controls can reduce the risk of such material misstatement that can occur due to these types of risks. For example, Microsoft, a multinational American technology company involved in development of computer software and other electronic products is prone to high risk of computer frauds. The company has thus established effective internal control over financial reporting procedures to reduce the risk of material misstatement. The internal controls include maintaining of records with reasonable accuracy, carrying out business transactions as per management authorization and continual review of its assets for reducing the chances of any material effect on the financial statements (Auditing in a Computer-Based Environment, 2012). The Integrated Framework issued by the Committee sponsoring organizations of the Treadway Commission have also found the company’s internal control system to be effective for minimizing the business risks (Microsoft Corporation, 2012.)
Literature Review
As such, the major benefits of implementing an effective internal control system for an organization are as follows:
- It is an effective method for businesses to reducethe chances of occurrence fraudulent activities.
- The internal control activities help in enhancing the effectiveness of the internal as well asexternal reporting practices of an organization.
- The internal controls help the businesses in achieving their financial objectives and goals by development of an effective financial reporting system
- The development of internal control systems ensures that all the business processes are carried out as per the standard guidelines and thus enhancing the accuracy and reliability of the business policies and procedures (Hermanson, Smith and Stephens, 2012).
Internal control as studied above is only the process that provides only the reasonable assurance that entities objectives can be achieved but it does not provide guarantee that there are no lacking in the applicable process. So it can be said that the probability of the achievement is affected by the various limitations that builds up or persists in the internal control environment. Internal control can be impacted by the human failures or any external impact on the organization. In the today’s world internal control are totally dependent on the information system which is completely based on the use of computers. Information systems that are based on computers are highly prone to the computer frauds and other material impact on the system process. So the limitations of the internal controls exist due to manual failure, any breakdown due to human interventions and any external events (Basu, 2010).
The limitations of the internal control can be divided into two parts. The first set of limitations is not in the control of management and no internal controls exist to prevent their occurrence. The other set provides such limitations about the internal controls that exists in entity but does not respond in such manner as it should. External impact on the organizations are kept in first set of limitations as it is not in hands of management control and human errors other failures are kept in the second set of limitations as there exists such internal controls that reduces the human errors but due to lack of information or implementations these internal control does not provide safeguard the assets. There exist many companies around the world where there is failure of complete internal controls due to lack of proper implementations of internal controls. For example, Toshiba, a well known company of Japan has gone through the internal control failure as in organization internal controls provide consultation service rather than providing the assurance service (Bhattacharyya, 2015). Due to lack of proper internal controls, external audit suffers a lot as there is no assurance from the management that financial reporting has been done with reasonable assurance.
Conclusion:
On the basis of overall analysis it can be said that adoption of proper internal controls is necessary for an entity to ensure its long-term growth and development. So internal controls provides the assurance in the process of auditing, especially in collecting the material evidence that provides reasonable assurance that financial reporting has been done as per applicable laws and regulations. The internal audit functions also provide large help to the external auditors for gaining an in-depth understanding of the business procedures as per the standard of IAS 315. Thus, it is essential for businesses to develop effective internal control systems for minimizing the business risk and thus reducing their exposure to fraudulent activities.
References:
Auditing in a Computer-Based Environment. 2012. Retrieved on 8 December, 2017, from https://www.accaglobal.com/in/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/auditing-computer-based-environment2.html
Basu. 2010. Fundamentals of Auditing. Pearson Education.
Bhattacharyya, A. 2015. Retrieved 8 December 2017, from https://www.business-standard.com/article/opinion/toshiba-a-case-of-internal-audit-failure-115080900760_1.html
Hermanson, D., Smith, J and Stephens, N. 2012. How Effective are Organizations’ Internal Controls? Insights into Specific Internal Control Elements. Current Issues in Auditing American Accounting Association 6 (1).
ISA 315 (REVISED). 2017. Identifying And Assessing The Risks Of Material Misstatement Through Understanding The Entity And Its Environment. . Retrieved on 8 December, 2017, from https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/isa-315.html
Leitch, M. 2016. Intelligent Internal Control and Risk Management: Designing High-Performance Risk Control Systems. CRC Press.
Microsoft Corporation. 2012. Annual Report. Retrieved on 8 December, 2017, from https://www.microsoft.com/investor/reports/ar11/financial_review/controls_procedures.html
Rusu, L. and Viscusi, G. 2017. Information Technology Governance in Public Organizations: Theory and Practice. Springer.
Singapore standard on Auditing. 2013. Retrieved 8 December 2017, from https://isca.org.sg/media/3538/ssa-315-revised.pdf
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