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Lesson 14: What is an Internal Control? - YouTube
Channel: Executive Finance
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in this lesson we're going to learn
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about internal control this is another
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aspect of financial management and
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financial statement auditing that
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requires a high degree of professional
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judgment let's set aside for a moment
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the fact that we are auditors so that we
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can just focus on understanding what
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internal controls are supposed to do as
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we've discussed in earlier lessons
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management designs internal controls to
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achieve three broad objectives reliable
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financial reporting efficient and
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effective operations and compliance with
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laws and regulations establishing an
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internal control system cost money
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the more controls a company puts in
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place the more policies and procedures
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the more control activities required and
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the more human and Technology resources
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necessary let's recognize up front that
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companies can neither eliminate nor can
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the entirely ignore internal control
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risk the right answer like so many
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things in life is somewhere in between
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and is based on a cost-benefit analysis
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management's interest in establishing a
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system of internal control his
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Protestant sound business practices
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including our reliable system control
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enables the preparation of accurate
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information which allows management to
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make sound business decisions internal
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controls safeguard the assets of the
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company from theft misuse or accidental
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destruction management also hopes to
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prevent waste and other inefficiencies
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in the business by establishing control
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mechanisms to monitor these key
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activities and internal controls play a
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critical role in preventing and
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detecting errors in fraud man as we will
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use some sort of risk management
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methodology to define the areas with key
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risks and once identified control
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activities can be designed to mitigate
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the identified risks so let's talk about
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a few examples to give you an idea of
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what internal controls look like and
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feel like say we are looking at the
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sales cycle what are the key risks here
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well first of all if we're using our
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hotel company as our example we want to
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ensure that all the sales get recorded
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what sorts of controls good management
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established and meet the subject
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well first they may have a daily
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reconciliation process of the sales to
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the reservations
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maybe they reconciled these sales to the
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occupied rooms we might have a security
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camera at the front desk to detect any
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thefts a measure likely reviews the
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daily sales reports to ensure that the
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room rates and the occupancy rates
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appear reasonable and even bigger area
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for risk might be in the restaurant than
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the lounge as there might be more cash
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changing hands as well as food and
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liquor inventory to safeguard the
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general manager may require a supervisor
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to review and document all void
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transactions daily inventory counts of
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all the liquor inventory may be done
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order slips are probably pre numbered
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and all the slips are accounted for at
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the end of each shift are you starting
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to get a sense of what an internal
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control is let's tie this back to our
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discussion on management assertions what
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assertions are all these activities
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designed to ensure that's right
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completeness and accuracy of sales many
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of these also are fraud controls but we
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will discuss those in a separate lesson
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management is responsible for
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establishing and maintaining a system of
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internal controls not the auditor the
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company is expected to design the system
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of controls to provide reasonable but
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not absolute assurance that the
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financial statements are fairly stated
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control systems are highly dependent on
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people and systems if people are not
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trustworthy or they act in concert they
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will attempt to override the controls to
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defraud the company if the systems are
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not reliable and produce information
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that is incorrect then the whole
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decision-making and financial statement
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reporting process are called into
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question so in fact there is some
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pervasive controls that we need to
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consider above all else before the
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detailed control activities can be
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deemed reliable the control environment
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is the term commonly referred to when
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describing the actions policies
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procedures that reflect the overall
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attitudes and activities of senior
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management if you look at the biggest
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corporate failures the likes of Enron
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and Tyco and Bayer Stern and world
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in Nortel although stemmed from a
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dysfunctional control environment at
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best and a corrupt control environment
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at worst it didn't matter how well the
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employees were performing their assigned
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tasks in these companies as senior
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management was overriding the controls
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or establishing a tone of the top that
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disregarded the importance of ethics and
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abiding by corporate policy we will pick
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up on this concept of control
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environment and its importance in the
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next lesson as we drill deeper into the
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topic of internal controls until then
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don't stop to get to the top to get to
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the top don't stop
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