Updated: Dec 31, 2022
Monitoring assesses the effectiveness of the internal control’s performance over time.
The objective is to ensure that the controls are working properly and, if not, to take necessary corrective actions.
Monitoring provides feedback to management on whether the internal control system they have designed to mitigate risks is:
Effective in addressing the stated control objectives;
Properly implemented and understood by employees;
Being used and complied with daily; and
In need of modification or improvement to reflect changes in conditions.
Management accomplishes the monitoring of controls through ongoing activities, separate evaluations (including the use of an internal audit function), or a combination of these two.
Ongoing monitoring activities in smaller entities are informal and are usually built into the normal recurring activities of an entity.
This includes regular management and supervisory activities and reviewing exception reports that the information system may produce.
Where management is closely involved in operations, they will often identify significant variances from expectations and inaccuracies in financial data and take corrective action to modify or improve the control.
Periodic monitoring (separate evaluations of specific areas within the entity, such as those performed by an internal audit function in a larger company) is not common in smaller entities.
However, periodic evaluations of critical processes could be conducted by qualified employees not directly involved in those processes or by hiring an external and suitably qualified person.
Management’s monitoring activities may also include the use of information from external parties that indicates problems or highlights areas needing improvement. Examples of this could include:-
Complaints from customers;
Comments from governing bodies such as franchisors, financial institutions, and regulators; and
Communications relating to internal control from external auditors and consultants.
Sources of Information Used for Monitoring
The entity’s information system will produce much of the information used in monitoring.
Management may tend to assume that this information is accurate.
If this information is not accurate, there is a risk that management could reach incorrect conclusions and make poor decisions.
Accordingly, when the auditor is evaluating the monitoring of controls, an understanding is required of:-
The sources of the information related to the entity’s monitoring activities; and
The basis upon which management considers the information sufficiently reliable for the purpose.
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