Risk Assessment, Controls and Risk Management CMA Part 1 However, objective number 1), achievement of operations objectives, may not be within the companys control. Achievement of operations objectives is dependent upon management judgment and decisions and many times on external events that are beyond managements control. Good internal control cannot prevent bad judgments and decisions, and it cannot control external events. For this reason, an internal control system cannot provide reasonable assurance that operations objectives will be met. An internal control system can only provide reasonable assurance that management and the board of directors are being made aware of whether or not the company is progressing toward its operational objectives, and being made aware in a timely manner. Therefore, internal control can be judged effective if members of management have reasonable assurance that: 1) They understand the extent to which the companys operations objectives are being achieved; 2) Published financial statements are being prepared reliably; and 3) Applicable laws and regulations are being complied with. As a process, internal control is a means to an end, not an end in itself. Internal control can provide reasonable assurance but not a guarantee that these objectives will be met. People, not policy manuals or forms, carry out internal control. Internal control is a process; and its effectiveness is the condition of the process or the state of the process at any given point in time. Development of Internal Control Concepts Ever since commercial organizations, nonprofit organizations and governments have existed, their leaders have recognized the need to exercise control in order to ensure that their objectives were achieved. Today, however, the leaders of an organization are not the only ones who care about its internal control poliCies and procedures. • For a public company, information on the effectiveness of its internal control system is important to investment to enable them to evaluate managements performance of its stewardship responsibilities as well as the reliability of its financial statements. • The companys external auditors recognize that an audit of a company with effective internal controls can be performed more efficiently. • The potential for U.S. corporations to make illegal political contributions or illegal payments to foreign governments is of concern to legislative and regulatory bodies and is addressed through internal control policies and procedures. • The development of larger organizations with increased numbers of employees has made it necessary for management to limit and direct employees authority and discretion. • Even customers have an indirect interest in internal controls because a strong internal control system may reduce the costs of production, and therefore also reduce products prices.
Posted on: Sun, 07 Sep 2014 08:50:22 +0000
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