INTERNAL CONTROLS

1. INTERNAL CONTROLS

2. INTERNAL CONTROLS DEFINED•Policies and procedures established by the agency’s Board of Directors, Management and other personnel, at all levels • Designed to provide reasonable assurance of achieving: →operational objectives of effective and efficient operations →financial reporting objectives of preparation of reliable financial statements →compliance objectives relating to applicable laws, regulations, and grant agreements

3. MANAGEMENT DEFINED • Board of Directors, Executive Directors, Program • Managers / Directors / Coordinators

4. INTERNAL CONTROL COMPONENTS • CONTROL ENVIRONMENT • RISK ASSESSMENT • INTERNAL CONTROLS • MONITORING • COMMUNICATION & INFORMATION

5. I. CONTROL ENVIRONMENT • Is the atmosphere in which business is conducted • Management sets the tone by its leadership style • Department heads are responsible for ensuring proper procedures are followed • Employees are responsible for following procedures related to their job duties

6. Positive Characteristics • Management conduct conforms to written policies and procedures • Employees are technically competent • Agency policies address human resource issues

7. Performance evaluations are completed periodically and are the bases for raises or promotions • Appropriate disciplinary action is taken in a timely manner

8. II. RISK ASSESSMENT • Involves control risks or the possibility that internal controls will not prevent or detect a material misstatement • Management identifies activities that could hinder or prevent the agency from achieving → operational goals → financial reporting and → compliance objectives

9. A. Risk Assessment Steps • Determine goals and objectives. • that are summarized in agency mission statement • outlined in policy and procedures • that applies to each program

10. Management should identify risks involved at each level. • employee duties, program activities, and the agency as a whole • fiscal department • external factors →changes in state and federal requirements →economic conditions of the communities →politics environment →advances in technology

11. Management performs a Risk Analysis. • evaluate quantitative & qualitative impact of each risk • prioritize risk →most likely to occur or →has the greatest impact • estimate the probability the risk will occur • rank according to how risk should be addressed

12. Management identifies controls that could manage the risk. a. controls that try to preventive risk are: →work environment →segregation of duties →proper authorization and documentation →and safeguarding assets

13. b. controls that detect risks once undesirable event has occurred • reviews • analysis • reconciliations •physical inventory counts •monitoring • audits

14. III. INTERNAL CONTROL CHARACTERISTISC • Overview 1. Internal controls are based on the agency’s policies and procedures. 2. Internal controls provides only a reasonable basis due to: • personnel involvement • external factors • cost / benefit considerations

15. 3. Good policies and procedures: • protect against waste, fraud, and inefficient use • ensures reliable data is captured • ensures compliance with agency policies, federal and state requirements

16. 4. Internal controls are monitored and evaluated on an ongoing basis 5. Effective internal controls are limited. • small staff size might not allow for segregation of duties • controls could be cost prohibitive →cost of implementing measures far out ways the benefits

17. 6. Attributes of good internal control system includes: • pre-numbered forms • segregation of duties • limited access to assets and data • adequate documentation and authorization • reviews of work performed • account analysis • timely reviews of controls

18. 7. Should consist of bothpreventive and detective controls

19. B. Preventive Controls • Segregation of duties • at least two people are involved in the transaction process • one person does not control the transaction process of initiating, authorizing, recording, safeguarding and reconciling

20. a. Small agencies should implement compensating controls • Program Director, Fiscal Director and Executive Director should perform detailed reviews • complex and certain dollar level activities should require Executive Director approval • supporting documents are reviewed and initialed for payment

21. Authorization • certain activities should require supervisor/manager approval or pre- approval • managers should review supporting documents before authorizing

22. Safeguarding assets / records. • each program manager should be responsible for record maintenance • WAP coordinator is responsible for ensuring a physical inventory count is performed

23. • computer access is restricted to authorized users → passwords allow access to specific computer functions → limit ability to input transactions to → limit authorization to make electric transfers to fiscal director ►should have paper authorization of Executive Director

24. C. Detective Controls • Reviews • used to determine if goals and objectives were achieved →examine reports →compare budget to actual • used to identify unusual conditions / trends →analyze account →compare current performance to prior performance

25. Reconciliations • used to identify differences that should be investigated, explained and corrected • reconcile high dollar, high volume accounts →cash →fixed assets →payroll tax accounts →client assistance ►program logs to GL account

26. MONITORING • Defined • regular management and supervisory activities that assess the quality of performance B. Why monitor •to ensure activities are properly performed • internal controls on an ongoing basis to determine that controls are functioning properly

27. C. Who monitors • Agency Program Coordinators →should review and document client assistance files reviewed • Fiscal Directors should sample accounting files • Executive Directors should sample high-risk activities

28. • OEO →program monitors report on compliance to specific programs →auditors report on internal control and compliance for all OEO programs • Independent auditors report on →financial reporting →internal control →and program compliance components

29. Determining if controls are adequate and properly executed. • Controls are adequately and properly functioning if: → operation objectives are achieved → financial statements are reliable and → activities are in compliance

30. V. INFORMATION & COMMUNICATION • Relevant information should be communicated to users in a timely manner and usable form →program sends fiscal the detail it needs to process information →fiscal sends program check information so program can close out files files

31. Identify risks and opportunities →by analyzing reports →staff meeting discussions →informal conversations • Related party transactions should be identified and documented in files

32. INTERNAL CONTROLS AND THE AGENCY A. Properly designed and executed internal controls 1. Will result in compliance with • federal and state requirements • agency policies and procedures •financial reporting requirements

33. 2. Allows auditors to reduce testing • reduces the time employees spend away from their daily duties • reduces the amount of time auditors spend at the agency

34. 3.Reduces the likelihood of fraud occurring undetected • Fraud requires motivation, personal characteristics and opportunity • Weak internal controls present an opportunity to commit fraud →usually longtime, trusted personnel commit fraud