ACCA/CAT

4. Internal control review and report

4.1 Reviewing internal control by board

<1>To carry out an effective review, boards should regularly receive and review reports and information on internal control, concentrating on the following:

a. What are the risks?

b. What are the strategies for identifying, evaluating and managing them?

c. How are risks monitored and how are any weaknesses dealt with?

d. How effective are the management and internal control systems in the management of risk?

e. Are actions are being taken to reduce the risks once found?

f. Do the results indicate that internal control should be monitored more extensively?

<2>Annual review of controls: Turnbull report states directors should conduct an annual review of internal control, which is wider-ranging than the regular review

a. Key risks and their identification/evaluation/management

b. Changes between annual assessments in significant risks and the company’s ability to respond to changes in the business/external environment

c. The effectiveness of control system in managing those risks

d. Actual and potential impact of any failings/ weaknesses on financial performance/condition

e. Whether prompt action has been taken to remedy any significant failing/ weaknesses

f. Scope and quality of management’s ongoing monitoring of risks and the work of internal audit/other assurance providers

g. Any need for more extensive monitoring

h. Communication of monitoring results to board

4.2 Reporting of internal control

<1>The board need to report on internal controls to shareholders (Turnbull report / Combined Code)

a. The board of directors should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets. So, shareholders, as owners of the company, are entitled to know whether the internal control system is sufficient to safeguard their investment.

b. The board should, at least annually, conducted a review of the effectiveness of the group’s system of internal controls and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems.

<2>Internal control report

a. Turnbull report: The board should disclose the existence of process for managing risks, how the board has reviewed the effectiveness of the process and that the process accords with the Turnbull guidance. The report should also include:

(a) An acknowledgement that they are responsible for the company’s system of internal control and reviewing its effectiveness.

(b) An explanation that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss

(c) A summary of the process that the directors (or board committee) have used to review the effectiveness of the system of internal control and consider the need for an internal audit function if the company does not have one. There should also be disclosure of the process the board has used to deal with material internal control aspects of any significant problems disclosed in the annual accounts

(d) Information about those weaknesses in internal control that have resulted in material losses, contingencies or uncertainties which require disclosure in the financial statements or the auditor’s report on the financial statement.

b. Sarbanes-Oxley section 404 (compulsory)

(a) Sarbanes-Oxley requires the directors to say specifically in the accounts whether or not internal controls over financial reporting are effective. The directors cannot conclude that controls are effective if there are material weaknesses in controls and significant deficiencies that result in a more than remote likelihood that material misstatements in the financial statements won’t be prevented or detected.

(b) The disclosure should include a statement of management responsibility, details of the framework used, disclosure of material weaknesses, and also a statement of attestation by the external auditors on management’s assessment of the effectiveness of internal control.

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