Internal control is a broad concept that involves internal controls that controls risks to an organisation. The process assures an organisations accurate financial reporting, effectiveness and efficiency in operations and statutory compliance’s. It is a means by which an organisations resources are monitored, measured and directed playing an important role in preventing fraud and protecting the organisations resources.
The King Committee on Governance issued the King Report on Governance for South Africa 2009 stating that an audit committee is vital to ensure the integrity of integrated reporting and internal financial controls. The audit committee should have full oversight of financial reporting risks in order to align recommendations with global best practice business principles.
Conduct for boards and directors of listed companies, banks, and certain state-owned enterprises where established, including financial and regulatory aspects, but also advocated an integrated approach that involved all stakeholders. Although the code is not enforced through legislation, it does co-exist with a number of laws that apply to the Companies Act. It is however applicable to all companies listed on the main board of the Johannesburg Stock Exchange and companies with shareholder equity over R50 million. The King lll although not enforced through legislation encourages all companies to adopt the code.
The key principles of the King lll report relating to internal controls
- A statement from the board of directors on the effectiveness of internal controls to be included in the integrated report.
- A statement from the company audit committee on the effectiveness of Internal Financial Controls.
- The statement made by the audit committee should be supported by a formally documented annual review of the design, implementation and effectiveness of the company’s system of Internal Financial.
- The companies audit committee should evaluate the nature and extent of the formal documented review of Internal Financial Controls.
- The nature and extent of weaknesses in internal financial control that are considered material and that resulted in actual material financial losses or material issues should be reported to the board of directors and stakeholders.
Meeting the IFC requirements of King III and putting its principles into practice requires a number of practical interventions.
- Is there a control framework governing financial reporting in the organisation?
- Have all the risks to the preparation of the financial statements in accordance with the applicable financial reporting framework (IFRIS), including where relevant, their fair presentation been identified and documented?
- Are there controls in place to address these risks and are they adequately designed to prevent or detect material misstatements in the financial statement results and disclosures?
- Do the internal controls identified operate as they are supposed to and are they appropriately evidenced?
- Has internal audit tested the internal controls identified above and reported the results to the company audit committee completely and accurately?
- Is the company audit committee’s assertion appropriately evidenced (including internal audit’s assessment)?
- Is there a process in place to ensure that the framework remains relevant over time and is embedded as part of the company’s financial reporting procedures?
The approach to Internal Financial Controls should ensure that a sensible balance is maintained between the costs of implementing and monitoring the framework and the benefits of such a framework.
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