INTERNAL AUDIT GUIDE TO INTERNAL CONTROLS INTRODUCTION DEFINITION

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INTERNAL AUDIT GUIDE TO INTERNAL CONTROLS INTRODUCTION DEFINITION


INTERNAL AUDIT

Guide to Internal Controls

Introduction




DEFINITION OF INTERNAL CONTROL


“Internal control is broadly defined as a process, effected by an entity’s board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the following categories:


Committee of Sponsoring Organizations of the Treadway Commission (COSO), September 1992


Controls can be preventive or detective. An internal control can be thought of as anything that prevents or detects errors or omissions.


The Institute of Internal Auditors defines a control as “any action taken by management to enhance the likelihood that established objectives and goals will be achieved.”


Preventive controls attempt to prevent or deter undesirable acts from occurring. They are proactive controls, designed to prevent a loss, error, or omission. Examples of preventive controls are separation of duties, proper authorizations, adequate documentation, and physical security over cash and other assets.

Detective controls attempt to detect undesirable acts that have occurred. They provide evidence after-the-fact that a loss or error has occurred, but do not prevent them from occurring. Examples of detective controls are variance analyses, supervisory reviews of account activity, reconciliations, and physical inventories.


Directive controls cause or encourage a desirable event to occur. These proactive controls include employee orientation and policies and procedures.


Mitigating or compensating controls are designed to compensate – at least partially – for a missing or excessively costly control. Examples include supervisory review where separation of duties is impractical, and monitoring budget variances in lieu of transaction processing controls.


All four of these types of controls are essential for an effective internal control system.


As employees become familiar with the types of controls they are more apt to use the tools and adhere to the policies set forth by management, and watch with a sharper eye for gaps in the control system. In addition, they will be predisposed to work within the framework dictated by these types of controls. This is all a part of creating a control conscious environment.


A control-conscious environment is necessary. It is an environment that supports ethical values and business practices. Management is responsible for “setting the tone” for their areas and encouraging the highest levels of integrity and ethical behavior, as well as exhibiting leadership behavior that promotes internal control and accountability. The following steps are examples of this leadership behavior:




CONTROL TOOLS – EXAMPLES

Following are a few of the many control tools available to you:




RESPONSIBILITY FOR INTERNAL CONTROLS

Every individual within the Health System has some role in effecting internal control. Roles vary in responsibility and involvement. Managers are ultimately responsible for the appropriate use and control of the assets entrusted to them. Management is accountable to the Health System Board, which provides governance, guidance and oversight.


Management is also often accountable to the IRS and state and federal agencies such as Health Services Cost Review Commission (HSCRC) and Centers for Medicare and Medicaid Services (CMS). In certain cases, management may be directly liable.


ROLE OF THE INTERNAL AUDIT DEPARTMENT


The Internal Audit Department is responsible for planning and performing internal audits at the Health System. Internal audits assist management by providing independent and objective analyses of activities and controls. Audit scopes can range from a single process to all business activities in a division, department, or school. Internal Audit makes recommendations as a result of these analyses.


The Executives for Finance (for profit and Hospital) and the Health System Internal Audit and/or Director of Business Integrity are responsible for coordinating the on-site activities of all external auditors including federal, state, and local government agencies, CPA firms, etc., and will serve as liaisons between external auditors and Health System departments when appropriate. If your office is contacted by any external audit agency, contact the appropriate person as follows: Executive for Finance at 301-665-4520 (for profit) or 301-790-8880 (hospital) or the Health System Internal Auditor 301-790-8812 or Director of Business Integrity at 301-790-8878.


Internal Audit is also responsible for investigating financial irregularities. See next section on “Suspected Theft or Misuse of Assets.”



SUSPECTED THEFT OR MISUSE OF ASSETS


The Business Integrity Department is responsible for investigating financial-related fraud at the Health System. Where appropriate, such investigations are coordinated with the Health System’s General Counsel, Vice President for Finance, Human Resources, and the Security Department.


Any information you provide will be handled confidentially.

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