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Internal Control: Importance, Components, and VAT Impact

Explore the significance of internal control, its key components, and the positive effects of VAT implementation on internal control. Discover why internal control is essential for every organization in preventing fraud, achieving goals efficiently, reducing errors, and maintaining order and organization.

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Internal Control: Importance, Components, and VAT Impact

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  1. 6 March 2018 What You Need to Know about Internal Control Dr. Yass Alkafaji, CPA, CFE Associate Professor of Accounting, AUS

  2. Agenda • Why need Internal Control? • Internal Control Definition • Internal Control Components • The Upside of VAT on Internal Control • Questions

  3. Why Internal Control? • It is everyone's business • Establish order and organization • Help achieve the organization’s goals and objectives efficiently and effectively • Prevent fraud and theft • Reduce errors

  4. Types of Fraud • Corruption • Assets misappropriation • Fraudulent financial reporting

  5. Fraud Triangle

  6. Internal Control INTERNAL CONTROL is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to: Management has a fundamental responsibility to develop and maintain effective internal control.

  7. Internal Control Components Control Environment Risk Assessment Control Activities Information and Communications Monitoring Activities

  8. Control Environment • Foundation for all other standards of internal control. • Pervasive influence on all the decisions and activities of an organization. • Setting the“tone at the top”. • Factors include: • integrity, • ethical values • competence of employees, and, • management’s philosophy & operating style.

  9. Risk Assessment • What can go wrong and how to mange the risk? • Risks are internal & external events (economic conditions, staffing changes, new systems, regulatory changes, natural disasters, etc.) that threaten the accomplishment of objectives.

  10. Control Activities • The fabric of internal control structure • Five principles in designing control activities: • Establish responsibilities • Segregate duties • Restrict access • Document • Verify independently

  11. Authorization Recording Custody of Assets

  12. Control Limitations Internal controls can never completely prevent and detect errors and fraud for two reasons: Benefits must exceed the costs Human error or fraud

  13. The Upside of VAT • VAT law requires all businesses to keep books and records • Requires documentation of all sales and purchases • Requires strong internal control that is subject to audit by the tax authority • Penalty of not keeping records can be up to AED 50,000

  14. Questions

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