 Hello and welcome to this session in which we'll discuss the purpose and objective of an important concept called internal control. Internal control is covered in your accounting courses as well as the BEC exam that's going to be going away later on the CPA exam as well as the audit. So it's very important to understand the concept of internal control. Also internal control will cover IT information technology so you have to have a deep understanding of internal control in order to appreciate the role and the benefit that the internal control generate for a company. So whether you are a student or a CPA candidate it's very important to understand this concept. What I want you to think about when you think of an internal control is think about this fort, this castle. What is inside this castle? Inside this castle we have our assets, we have our assets our resources but basically our cash inventory property plant and equipment stuff that the company cares about because we need to use it to run the business. Inside this fort sits something very important and that's our accounting information system. That's the system that generates our financial statements income statement balance sheet statement of cash flows stockholders equity. Also this accounting information system generate internal reports that's going to help us run the company. So inside this fort is a very important component the accounting information system. Inside this fort we have employees our employees and those employees are very important to us. We want to make sure they're running the company efficiently effectively. Now what is this fort protecting us from? Well it's protecting us from this group of people. What is this group of people represent? Those people represent misstatement errors fraud theft which is misappropriation so on and so forth. So misstatements errors fraud theft they are a threat to our assets to our accounting information system they're going to try to convince our employees to commit fraud to steal money from us or budge the financial statements. The fort is to help us protect assets the accounting information system and the employees. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today no obligation no credit card required. Now let's talk about specifically what internal control is. Well that fort is basically policies processes and procedures that's what that fort is but it's set up by management. Management set it up to perform the following objectives. We have four objectives one reliability of financial reporting and this is what I meant by the accounting information system. We want to make sure that the figures reported whether externally or internally are fairly and timely presented. Fairly means they are correct they they represent what actually happened all the figures are there the valuation is correct and timely we are provided this information for users on a timely basis so they can make relevant decision about the company or how to run the company that's one objective of the financial of the internal control reliability of financial reporting number two efficiency and effectiveness of operation simply put we have asset we have resources we're going to be utilizing those resources in the most efficient and effective manner what does that mean it means operating at the lowest cost while achieving the same objective it doesn't mean we need to reduce cost to minimal well yes we reduce cost to minimal as long as we are achieving our business objective so we don't want to have any wasteful assets. Now how do we do so we set standards we set budget we use variances to follow up this is how we can have efficient and effective operation. Compliance with laws and regulation we want to make sure our employees who are inside this fort are following the rules the rules and regulations how we give them training education yearly reviews reminding them about the policies and procedure given them that handbook when they start working for the company company's policies reviews take disciplinary action to send the correct message if someone did something wrong violated laws or regulations guess what we discipline them and the fourth object the fourth objective of that fourth of the internal control is the safeguarding of assets how do we safeguard assets pretty straightforward locks security cameras fences any prevention of loss effort is considered safeguarding of assets we could use password if the information is not physical it's intangible in nature or tech digital. Now there are five components of the internal control now i'm gonna kind of show you show you physically what it looks like so if this is the fort what is this fort composed of what's what makes up this fort there are five components that make up this fort the first component is controlled environment again we're gonna have one whole session about controlled environment in which we'll discuss the the various components there are sub components of control environment we have another component called monitoring also we'll have a session about monitoring to understand what is monitoring within internal control notice those are the component of the fort risk assessment is the company assessing the risk properly information and communication they have a proper communication infrastructure accounting information system is communication flowing smoothly throughout the company upward downward so on and so forth and also the company will have control activities and all of those component that's what internal control is that's what this fort is composed of those five component those five components put together properly utilized properly implemented and maintained they can protect you from misstatements or minimize misstatement minimize or you'll try to eliminate but you're gonna see there are always weaknesses in internal control notice the weaknesses here this area is not protected this area is not protected right there are always weaknesses but we'll do our best in avoiding preventing misstatements avoiding errors and fraud protecting our our assets from theft and appropriation what should you do now go to far hat lectures and work mcqs through false multiple choice questions that's going to help you do better on your exam good luck study hard