ExpertInternal Controls
Learning outcomes
- Define the control environment parameters.
- Differentiate between physical controls, logical access controls, and reconciliations.
The Control Environment
Internal controls are processes designed to provide reasonable assurance that the company will achieve its objectives, report accurately, and comply with laws. The foundation is the Control Environment (the 'tone at the top' set by management).
Types of Control Activities (SPAMSOAP)
- Segregation of Duties: No single person should control all phases of a transaction (e.g., the person who orders goods should not be the one who pays for them).
- Physical Controls: Locks, safes, security cameras.
- Logical Access Controls: Passwords, biometric logins, access matrices (restricting IT access based on job role).
- Arithmetical/Accounting: Bank reconciliations (checking the company's cash book against the bank statement).
Requiring two different directors to sign any cheque over £10,000 is an example of which type of control?
Reasonable vs Absolute Assurance
Internal controls can NEVER provide absolute (100%) assurance against fraud or error. Why? Because of human error, management override, or collusion (two employees teaming up to bypass segregation of duties).
Reconciliations
A reconciliation is an arithmetical control. It compares two independent sets of records to ensure they match. If the company ledger says we have £5,000, but the bank statement says £4,000, the accountant must investigate the variance.
Which of the following is a 'logical access control'?
Exam Focus
Examiners often ask what defeats segregation of duties. The answer is almost always Collusion (when two or more people conspire to commit fraud together).
What is the primary limitation of internal controls?
Comparing a supplier's statement of account with the company's own purchase ledger is an example of:
The 'Control Environment' is best described as:
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