Lesson04-IC - CMA Ontario – January 2008 INTERNAL CONTROL...

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Unformatted text preview: CMA Ontario – January 2008 INTERNAL CONTROL Contents Page Introduction 2 1. Internal Control Concepts 7 2. Specific Internal Control Procedures 16 3. Sarbanes-Oxley Act Requirements 20 4. CMA Canada IMAP on Internal Control 27 Internal Control Page 2 CMA Ontario – January 2008 INTRODUCTION In the very small privately owned and operated firm, the entrepreneur ensures that everything is done appropriately. As the beneficiary, the entrepreneur is motivated to ensure that all activities are necessary and also efficient and effective in providing customers with value. As the firm increases in size, product diversity, and number of locations, the oversight of the entrepreneur fails to be adequate. The entrepreneur cannot know everything. A system needs to be put in place to ensure that the required activities are properly carried out. This system is called internal control. The overall objective of internal control is to ensure the organization’s activities get carried out appropriately. The CICA Handbook defines internal control as follows: Internal control comprises the plan of organization and all the coordinate systems established by management of an enterprise to assist in achieving management's objective of ensuring, as far as is practical, the orderly and efficient conduct of its business, including the safeguarding of assets, the reliability of the accounting records and the timely preparation of reliable financial statements. CICA Handbook , Section 5200.05 Generally, internal control systems are designed to provide reasonable assurance that… • transactions entered into are authorized, either generally or specifically, by management, • transactions are properly recorded, • assets are properly safeguarded, and • accurate records are maintained. Management's Objectives for Internal Control The responsibility for establishing a system of internal control is one of the functions of management. Managerial policy will establish the objectives to be accomplished by the system of internal control. These objectives should ensure the orderly and efficient conduct of the business affairs and include: (a) discharge of statutory responsibilities; (b) profitability and minimization of costs; (c) prevention and detection of fraud and error; (d) safeguarding of assets; (e) reliability of accounting records; and (f) timely preparation of reliable financial information. CICA Handbook , Section 5205.05 Discharge of statutory responsibilities refers to the requirements of the Canada Business Corporations Act and similar provincial acts that require that ‘a corporation shall prepare and Internal Control Page 3 CMA Ontario – January 2008 maintain adequate accounting records' (CBCA sec 20(2)) and 'a corporation and its agents shall take reasonable precautions to (a) prevent loss or destruction of,(b) prevent falsification of entries in, and (c) facilitate detection and correction of inaccuracies in the records and registers required by this Act to be prepared and maintained' (CBCA sec 22(2)). registers required by this Act to be prepared and maintained' (CBCA sec 22(2))....
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Lesson04-IC - CMA Ontario – January 2008 INTERNAL CONTROL...

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