Theories Of Internal Control System

Theory of systems

Systems are interrelated components or tools for transforming policies into performance. These components are inter-dependent, which means if one of the components is insufficient it automatically causes the failure of the whole system. An organization requires a system of controls for its survival, effectiveness and efficiency. An effective internal control system is an integrated system with interdependent and interrelated components, supporting principles and features. Harvey and Brown (1998) identified control environment, accounting system and control procedures as the major components of internal controls (Harvey & Brown, 1998). The Committee of Sponsoring Organizations (COSO) is a voluntary, private, organization established

The board of directors is ultimately responsible for ensuring that an adequate and effective system of internal controls is established and maintained.

Principle 2:

Senior management should have responsibility for implementing strategies and policies approved by the board; developing processes that identify, measure, monitor and control risks incurred by the bank; maintaining an organizational structure that clearly assigns responsibility, authority and reporting relationships; ensuring that delegated responsibilities are effectively carried out; setting appropriate internal control policies; and monitoring the adequacy and effectiveness of the internal control system.

Principle

The internal audit function, as part of the monitoring of the system of internal controls, should report directly to the board of directors or its audit committee, and to senior management.

Principle 12:

Internal control deficiencies, whether identified by business line, internal audit, or other control personnel, should be reported in a timely manner to the appropriate management level and addressed promptly. Material internal control deficiencies should be reported to senior management and the board of directors.

Evaluation of Internal Control Systems by Supervisory Authorities

Principle 13:

Supervisors should require that all banks, regardless of size, have an effective system of internal controls that is consistent with the nature, complexity, and risk inherent in their on- and off-balance-sheet activities and that responds to changes in the bank’s environment and conditions. In those instances where supervisors determine that a bank 's internal control system is not adequate or effective for that bank’s specific risk profile (for example, does not cover all of the principles contained in this document), they should take appropriate