Which of the following is not a key method of monitoring internal control system performance?

There are two basic categories of internal controls – preventive and detective.  An effective internal control system will have both types, as each serves a different purpose.  As you perform routine processes, or when you are thinking of implementing a new procedure or process, it is important to ask the following questions to help determine the appropriate control:

• What could go wrong?
• What steps have been taken to ensure that something does not go wrong?
• How can you verify that nothing went wrong?

The answers to these questions will enable you to better target the type of control that is needed.

Preventive Controls

Preventive controls aim to decrease the chance of errors and fraud before they occur, and often revolve around the concept of separation of duties. From a quality standpoint, preventive controls are essential because they are proactive and focused on quality.

Examples of preventive controls include:

• Separation of duties
• Pre-approval of actions and transactions (such as a Travel Authorization)
• Access controls (such as passwords and Gatorlink authentication)
• Physical control over assets (i.e. locks on doors or a safe for cash/checks)
• Employee screening and training (such as the PRO3 Series to increase employee knowledge)

Detective Controls

Detective controls are designed to find errors or problems after the transaction has occurred.  Detective controls are essential because they provide evidence that preventive controls are operating as intended, as well as offer an after-the-fact chance to detect irregularities.

Examples of detective controls include:

• Monthly reconciliations of departmental transactions
• Review organizational performance (such as a budget-to-actual comparison to look for any unexpected differences)
• Physical inventories (such as a cash or inventory count)

Last Reviewed

04/30/2022: reviewed content

Training

PRO303: Internal Controls at UF

University Controller’s Office: (352) 392-1321

This policy defines the University’s responsibility for integrating internal controls at all levels throughout the organization.

Reason for Policy

This policy establishes the key areas of internal control and related responsibilities for systems and processes outside of the University’s standard business practices.

Policy Statement

The University and many of the external readers of the financial statements rely on the integrity of the University’s financial reports and processes that is enhanced by strong internal controls.  Management of the University at every level is responsible for designing, implementing and enforcing internal controls appropriate for business processes.  Every employee is responsible to know and implement applicable internal controls related to the following five components:  control environment, risk assessment, control activities, information and communication and monitoring.

Every manager and employee is responsible for the systems and processes that fall under their sphere of influence.  University departments need to especially focus on designing and implementing systems of internal control around processes outside of the University’s PeopleSoft environment that affect the University’s fiscal processes.  As part of this responsibility, managers and employees must ensure that every process contains adequate internal control activities to help ensure the following key objectives are achieved:

Completeness: All valid transactions for a given period have been processed and individual or groups of transactions have not been omitted or misdirected.  A common control is to have transactions grouped by "batch" and to prove each batch as it is processed. Another example is to develop a control total of transactions that should be processed today and verifying that total against the totals reported on system reports, or verifying today's deposit against the transactions posted to the ledger.

Authorization: Only those transactions that meet management's criteria are processed.  Some ways to accomplish this objective include requiring documentation of the authorization, such as the manager's initials, signature, or electronic approval on all transactions being processed.  Additional ways include edit checks within the system to detect "improper' transactions and the timely approval of transactions.  Individuals who approve transactions must have the authority to do so and knowledge to make informed decisions.  An individual should not approve a transaction for which they are the payee.

Accuracy: Transactions are accurate in amount, posted to the appropriate ChartFields, and consistent with the originating transaction data.

Timeliness: Transactions are recorded within the appropriate reporting period.  All transactions must be processed within the applicable accounting period and recorded before there is opportunity for amounts to be misdirected.

Safeguarding of Assets: Access to physical assets and information systems is controlled and properly restricted to protect against misappropriation, misuse, accidental loss, and ensure accountability.  Examples of physical security include a safe, locked doors, locked cabinets or drawers, card key systems, and computer passwords.  This control objective is most common for inventories of supplies, cash, and investment securities, but also includes the safeguarding of data.

Managerial Review: Sufficient oversight of activities ensures controls are functioning as intended and the detection of unauthorized activities and material errors.  Managerial review includes activities taken by the manager to gain assurance that controls are functioning or provide a warning before a malfunction significantly impacts operations.  There are a number of tools a manager can employ to achieve this objective, including:

• Reviewing and testing reconciliations to ensure they are performed correctly.
• Reviewing an aging of accounting balances
• Reviewing reconciliations
• Performing balance fluctuation analysis
• Comparing rates of occurrence.

Definitions

Internal Control is broadly defined as a process, affected by an entity’s people, 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
3. Compliance with applicable laws and regulations. 

Internal control consists of five interrelated components.  These are derived from the way the University is managed, and are integrated with the management process.

Control Environment -  The control environment sets the tone of the University, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include the integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the Board of Curators.

Risk Assessment -  The University faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of the objectives, forming a basis for determining how the risks should be managed.

Control Activities - Control activities are the actions established through policies and procedures that help ensure that management’s directives to mitigate risks to the achievement of objectives are carried out. Control activities are performed at all levels of the University, at various stages within business processes, and over the technology environment. They may be preventive or detective in nature and may encompass a range of manual and automated activities such as authorizations and approvals, verifications, reconciliations, and business performance reviews. Segregation of duties is typically built into the selection and development of control activities. Where segregation of duties is not practical, management selects and develops alternative control activities.

Information and Communication - Pertinent information must be identified, captured and communicated in a form and timeframe that enable employees to carry out their responsibilities. Information systems produce reports, containing operational, financial and compliance-related information, that make it possible to run and control the business. The employees deal not only with internally generated data, but also information about external events, activities and conditions necessary for informed business decision-making and external reporting. Effective communication also must occur in a broader sense, flowing down, across and up the organization. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. The employees must understand their own role in the internal control system, as well as how individual activities relate to the work of others. Employees must have a means of communicating significant information upstream. There also needs to be effective communication with external parties, such as customers, suppliers, regulators and shareholders.

Monitoring - Internal control systems need to be monitored--a process that assesses the quality of the system's performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management/leadership and the Board of Curators.

There is synergy and linkage among these components, forming an integrated system that reacts dynamically to changing conditions. The internal control system is intertwined with the University’s operating activities and exists for fundamental business reasons. Internal control is most effective when controls are built into the entity's infrastructure and are a part of the essence of the enterprise. "Built in" controls support quality and empowerment initiatives, avoid unnecessary costs and enable quick response to changing conditions.

Source:  COSO Internal Control Integrated Framework, www.coso.org/documents/internal%20control-integrated%20framework.pdf

Accountabilities

Every employee:

• Is responsible to know and follow appropriate policies and procedures for their job.
• Has a responsibility for internal controls.
• Is responsible for the execution of control activities.
• Must be aware of opportunities to increase the reliability and integrity of the University’s accounting systems.
• Notify supervisors of weaknesses in, and opportunities to enhance internal controls.

Managers:

• Are responsible for establishing appropriate controls in their sphere of influence.
• Are responsible for monitoring the effectiveness and functioning of controls.
• Provide employees with appropriate training and guidance to accomplish job responsibilities

Additional Details

Forms

Related Information

Policy 21101 on Fiscal Responsibility

History

Formerly Accounting Policy Manual 2.25.05 – Internal Controls (revised 5/6/2007)

Procedure