Internal Control System Literature Review

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OCTOBER, 2016 CHAPTER TWO LITERATURE REVIEW 2.0 Introduction This chapter is the compilation of definitions and nature of internal controls system and internal audit, classifications of internal control systems as well as the critical areas of such system. It also considers the role of internal controls as well audit used of internal control. 2.1 Overview and Concept of Internal Control and Internal Audit Internal controls is one of the most important and fundamental concepts that business professionals at all levels and both external and internal auditors must understand. A system of strong internal controls has been and continues to be the basis for effective operational and accounting business processes.The business…show more content…
Milichamp (2002) puts the types of internal controls as; Safeguarding assets, Separation of duties, supervision, Verification, Approval and authorization, Documentation, Safeguarding Assets, and Reporting. However, many other authors such as Dr Lousteau (2006), the state university of New York and diNapoli (2005) have agreed that the types of internal controls includes directive controls, preventive controls, compensating controls, detective controls, and corrective actions. These types of internal controls are explained below. 2.2.1 Directive Controls Directive Controls relate to policies and put in place by top management to promote compliance with independence rules. To ensure compliance with directive controls, a clear, consistent message from management that policies and procedures are important must permeate the organization. They provide evidence that a loss has occurred but do not prevent a loss from occurring. Examples of detective controls are reviews, analyses, variance analyses, reconciliation, physical inventories, and audits. However, detective controls play critical role providing evidence that the preventive controls are functioning and preventing losses. Control activities include approvals, authorizations, verifications, reconciliation, and reviews of performance, security of assets, segregation of duties, and controls over information systems.…show more content…
It is the foundation for all other components of internal control. The control environment reflects the board of directors’ and management’s commitment to internal control. It provides discipline and structure to the control system. Elements of the control environment include the organization structure of the institution, management’s philosophy and operating style, the integrity, ethics, and competence of personnel, the external influences that effect the organization’s operations and risk management practices, the attention and direction provided by the board of directors and its committees and the effectiveness of human resources policies and procedures. (Administrator of National Banks, Comptroller’s Hand Book 2001), Hevesi (2005) however considers the Control environment to be the attitude toward internal control and control consciousness established and maintained by the management and employees of an organization. It is a product of management’s governance that is its philosophy, Style and supportive attitude, as well as the competence, ethical values, integrity and morale of the people of the organization. The control environment encompasses the attitudes and actions regarding

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