2 of 2--internal controls sp 2010
DESCRIPTION
Short presentation on 'internal controls for the class IPOL 8530 'The Finance Function' in Social Change Organizations'. This class is part of the Master of Public Administration (MPA) program in the Graduate School of International Policy & Management at the Monterey Institute of International Studies (MIIS). Presentation created by Alfredo Ortiz Aragón, adjunct professor.TRANSCRIPT
IPOL 8530—Spring 2010 The Finance Function in Nonprofit & Public Organizations
Alfredo Ortiz
Policies and procedures—Internal controls
Increasing transparency and safeguarding assets
2 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Reasons for internal controls
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Mostly on the governance side of things
Safeguard the assets of the organization
Prevent unintentional misstatements of accounts and reports
Run the business efficiently, with rules that work, and apply to everyone (consistency)
Create an environment of stewardship and accountability
Compliance with laws and regulations
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Caveats for internal controls Provides reasonable, not absolute assurance that
objectives will be met
Reasonable assurance should provide appropriate balance between risk and level of control—controls must always be gauged to respond to the actual level of risk.
Stronger controls for higher risk levels and fewer controls for lower risk levels.
Cost/benefit?
But…
Policies & procedures around internal controls must first be balanced to fulfill their control need.
4 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Internal Control per A-133
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A process, effected by an entity's management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories
1. Effectiveness and efficiency of operations;2. Reliability of financial reporting; and3. Compliance with applicable laws and
regulations MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Questions To Ask When Identifying Risk What assets do we need to protect? Where are
we particularly vulnerable?
What could go wrong?
What activities are regulated by the government?
What’s our greatest legal exposure?
How do we protect our reputation?6 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Common Areas of High Risk Procurement
Equipment
Petty cash
Travel
Payroll
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Internal controls
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The control environment
Risk
Information and communication flows
Control activities
Monitoring
Our internal controls processes should address the following:
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Control environment
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Sets the organizational tone, influences control consciousness of people and is the foundation of internal controls.
Integrity and ethical values
Commitment to competence Human resource policies & practices
Board of directors and audit committee
Management philosophy and operating style
Organizational structure Assignment of authority & responsibility
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Risk—susceptibility of material misstatement
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Inherent risk Comes from within Could have to do with the nature
of the business
Control risk The risk that a company's internal
controls are insufficient to mitigate or detect errors or fraud
Based on assessed strength of internal controls system
Detection risk The risk that the auditor will not
detect a material misstatement that exists in the financial statements
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
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Information & communication
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How reliable is the information system and accounting system—technology, structure, maintenance, etc.?
How clear is the communication system regarding individual roles and responsibilities of operating the internal control system?
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Control activities
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Actions or procedures that manage or reduce risk
Preventive and Detective Controls
Preventive – attempt to deter or prevent undesirable events
Detective - attempt to detect undesirable events after the fact
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Control activities
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Information processing controls General systems,
hardware, software
Procedural controls Authorizations Documentation Independent checks
Segregation of duties
Physical controls Activity performance
reviews Continual budget vs.
actual Relationship of non-
financial to financial data Training graduates vs.
training expense
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Monitoring
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Investment in improving processes and innovation
Willingness to allow professional diagnosis for improvement
External audits
Scheduled (but not announced) internal testing of systems
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Reminder—Written procedures
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Test if written procedures exist and are followed covering the following areas: A/R A/P Procurement Inventory and asset control Accounting processes Cost evaluation Other relevant procedures
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Basic Controls
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Control over receipts
Pre-numbered receipts
2 people for Cash collections and mail and make list of receipts
Timely deposits—everything into the bank
Monthly reconciliation to invoices or other billings
Control over disbursements
Always by check with support (use a standard internal doc) Prior authorization Tied to budget (i.e. planned) Contract in place?
More than one sig?
Have someone else reconcile the bank account
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Written procedures—A/R
A/R procedures Simple A/R cycle
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Billing and how invoices are processed
How payment is followed up (avoid overly “aged” AR)
Opening the mail Receiving money Recording receipt of money Depositing money, and, Reconciling bank accounts.
Tracking service delivery
Invoicing
Collecting
Depositing
Reconciling
How and when we bill for
services and get paid
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Written procedures—A/P
Simple A/P procurement cycle A/P procedures
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Needs ID & specs design
Choose product or
service
Internal approval
and purchase
Receipt
Final document-
ation
Verifying proper authorization before checks are run Setting limits on when two signatures
are needed Petty cash system for very small
purchases
No duplicate payments Payment against invoice Bill stamped paid
Control of the check stock
Receipt of goods in proper condition
Easily accessible, relevant documentation
How and when we enter into
purchases and pay our bills
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Definition of Auditing A systematic process of
objectively… evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. Source: American
Accounting Association
20 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Try this again
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A logical, organized process of examining what you do in comparison with what you should be doing—all measured against established criteria.
The process communicates an opinion as to the reliability of what you say (assert) you do and may help or hurt your credibility as an organization.
Source: Me
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Why are audits needed?
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1. Relevance2. Reliability
Users of financial statements look to the independent auditor’s report to see if these qualities have been met
FASB states that 2 primary qualities make accounting information useful for decision making:
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Required Scope of A-133 Audits
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GAAP Financial Statements Internal Controls Compliance with:
laws, regulations, Provisions of contracts or grant agreements that may
have a direct and material effect on each of its major programs.
Follow upMIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Auditor minimum expectations
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Perform the audit with: Technical competence Integrity Independence Objectivity
Detect intentional or unintentional material misstatements
Prevent the issuance of misleading financial statements
Stakeholders expect auditors to:
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Internal controls cases http://www.eurojournals.com/irjfe_27_11.pdf
http://www.colorado.edu/ArtsSciences/facultystaff/administration/budget/docs/CaseStudies.pdf
http://jobfunctions.bnet.com/abstract.aspx?docid=55890
Do a Google search—there is tons online25 MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"
Exercise
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Share an internal control story from your own experience. It could be:
Witness of risky behavior or actual loss
Or accident waiting to happen
Something caught in the nick of time, i.e. good procedures
Too much control
Not enough control
Etc.
The scene• What was at
stake?The good
The bad and ugly (drama)
The moral (big ideas)
• Share your story as a blog post either individually or as a group.
• If as a group, create a single group story mixing the best of all the stories
• Make it dramatic• Exaggerate to make a point• Change names and dates to protect the
innocent• Use the framework below to guide your
discussion if needed• Post the story to the wiki (1 for the group)
• If individual, post individually
MIIS--IPOL 8530, "The Finance Function in Social Change Organizations"