Good Business Practices

Controls are simply good business practices.

Simply defined internal controls are those procedures you perform everyday to get your job done. For example completing a form, having it signed and approved, and making a copy for your records, is a procedure and a control all at the same time.

A system of controls (or procedures) reduces business risk, which is the probability that certain exposures will lead to loss or adverse business conditions.

• Internal controls are practices that protect or make more efficient use of the University's assets. They are the kinds of things you already do because they are generally just good business practices. Internal controls can involve anything from protecting computer files with passwords to making sure that the door is locked when everyone has gone home for the night.
  
  Typically, management is responsible for developing an appropriate system of internal controls, but every employee is responsible for following and applying those practices. They may seem unimportant by themselves, but taken as a whole, they can have a major impact on the University's operations. Internal controls can be preventive, detective or corrective in nature:

• Preventive controls are designed to discourage or pre-empt errors or irregularities from occurring. They are more cost-effective than detective controls. Credit checks, job descriptions, required authorization signatures, data entry checks and physical control over assets to prevent their improper use are all examples of preventive controls.

• Detective controls are designed to search for and identify errors after they have occurred. They are more expensive than preventive controls, but still essential since they measure the effectiveness of preventive controls and are the only way to effectively control certain types of errors. Account reviews and reconciliation's, observations of payroll distribution, periodic physical inventory counts, passwords, transaction edits and internal auditors are all examples of detective controls.

• Corrective controls are designed to prevent the recurrence of errors. They begin when improper outcomes occur and are detected and keep the "spotlight" on the problem until management can solve the problem or correct the defect. Quality circle teams and budget variance reports are examples of corrective controls.

Auditors evaluate the effectiveness of an operation's internal controls by first gathering information about how a unit operates, identifying points at which errors or inefficiencies are possible, and identifying system controls designed to prevent or detect such occurrences. Then, they test the application and performance of those controls to assess how well they work. You can evaluate controls in your department's operations by following the same process.

Internal controls only provide reasonable assurance, a concept which recognizes that the "cost" of internal controls should not exceed the benefits derived from them. Management (with input from Internal Audit) must make the decision as to how much control is enough. As needs and personnel change, management will make changes in the systems of control to ensure that the system is still providing reasonable assurance that risks are being avoided.

Control Activities:

Control activities are those specific policies and procedures that help ensure management directives are implemented. They include a wide range of activities that occur throughout the organization, by supervisory and front-line personnel. This is not an all-inclusive list, but here are some examples of common control activities.

• Segregation of Duties: Duties are divided, or segregated, among different people to reduce the risk of error or inappropriate actions. For instance, responsibilities for authorizing transactions, recording them and handling the related asset are divided.

• Physical Controls: Equipment, inventories, securities, cash and other assets are secured physically, and periodically counted and compared with amounts shown on control records. Access is restricted to those with authority to handle them.

• Reconciliations: Comparisons are made between similar records maintained by different persons to verify transaction details.

• Policies and Procedures: Established policies, procedures and even job descriptions provide guidance and training to ensure consistent performance at a required level of quality.

• Transaction and Activity Reviews: Managers running functions or activities review performance reports. They may relate different sets of data - operating or financial - to one another, together with analyses of the relationships.

Information Processing Controls: A variety of controls are performed to check accuracy, completeness and authorization of transactions. Data entered are subject to edit checks or matching to approved control files. Numerical sequences of transactions are accounted for, and file totals are controlled and reconciled with prior balances and control accounts. Development of new systems and changes to existing ones are controlled, as is access to data, files and programs.