Question Tag: COSO

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  • 10 Marks

PSAF – Dec 2023 – L2 – Q3a – Public expenditure and financial accountability framework

Explain the five components of the Integrated Framework of Internal Control System recommended by COSO.

An effective internal control system is a prerequisite for addressing risks and providing reasonable assurance that the assets of an organization are safeguarded. It also contributes to the achievement of an organization’s control objectives. In line with this, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission recommended five integrated internal control components to appraise internal control systems.

Required:
Explain the FIVE (5) components of the Integrated Framework of Internal Control System recommended by COSO. (10 marks)

Component 1: Control Environment
The control environment describes a set of standards, processes, and structures that provide the basis for carrying out internal control across the organization. Key areas of interest to PEFA are:

  • The personal and professional integrity and ethical values of management and staff, including a supportive attitude toward internal control consistently throughout the organization.
  • Commitment to competence.
  • The “tone at the top” (i.e., management’s philosophy and operating style).
  • Organizational structure.
  • Human resource policies and practice.

Component 2: Risk Assessment
The risk assessment forms the basis for determining how risks will be managed. A risk is defined as the possibility that an event will occur and adversely affect the achievement of organizational objectives. Key areas include:

  • Risk identification.
  • Risk assessment (significance and likelihood).
  • Risk evaluation.
  • Risk appetite assessment.
  • Responses to risk (transfer, tolerance, treatment, or termination).

Component 3: Control Activities
Control activities are actions (generally described in policies, procedures, and standards) that help management mitigate risks to ensure the achievement of objectives. Control activities may be preventive or detective in nature and may be performed at all levels of the organization. Key areas include:

  • Authorization and approval procedures.
  • Segregation of duties (authorizing, processing, recording, reviewing).
  • Controls over access to resources and records.
  • Verifications.
  • Reconciliations.
  • Reviews of operating performance.
  • Reviews of operations, processes, and activities.
  • Supervision (assigning, reviewing, and approving, guidance, and training).

Component 4: Information and Communication System
Information is obtained or generated by management from both internal and external sources to support internal control components. Communication based on internal and external sources is used to disseminate important information throughout and outside of the organization, as needed to respond to and support meeting requirements and expectations. The internal communication of information throughout an organization also allows senior management to demonstrate to employees that control activities should be taken seriously.

Component 5: Monitoring
Monitoring activities are periodic or ongoing evaluations to verify that each of the five components of internal control, including the controls that affect the principles within each component, are present and functioning. Key areas include:

  • Ongoing monitoring.
  • Evaluations.
  • Management responses.
  • 10 Marks

PSAF – May 2020 – L1 – Q3a – Public expenditure and financial accountability framework

Explain control objectives in public financial management relevant to the PEFA framework and discuss internal control components.

The Public Expenditure and Financial Accountability (PEFA) framework recognizes the importance of internal control systems in achieving the desired fiscal and budgetary outcomes. Internal control systems play a vital role across every pillar of public financial management. It addresses risk and provides assurance that operations meet the control objectives of the PEFA framework. Therefore, it assesses how effectively the internal control systems operate in the country by making reference to the internal control components developed by other international organizations, specifically the Committee of Sponsoring Organizations (COSO) of the USA.

Required:
i) Explain THREE (3) control objectives in public financial management relevant to the PEFA framework of assessment.
(3 marks)

ii) Discuss FIVE (5) components of internal control in relation to the PEFA Framework.
(5 marks)

iii) Explain TWO (2) limitations of the PEFA Framework for assessing public financial management.
(2 marks)

i) Control objectives in public financial management relevant to the PEFA framework

  1. Orderly, ethical, economical, efficient, and effective operations: Ensuring that operations are executed in a manner that is ethical, efficient, and effective.
  2. Accountability obligations: Ensuring that public officers and institutions fulfill their accountability obligations.
  3. Compliance with laws and regulations: Ensuring that applicable laws and regulations are complied with.
  4. Safeguarding resources: Ensuring that resources are safeguarded against loss, misuse, and damage.

ii) Components of internal control in relation to the PEFA Framework

  1. Control environment: The values and culture of the organization, setting the tone for control at the top by which the entire organization is directed and controlled.
  2. Risk assessment: Identifying and mapping risks within the organization to ensure they are effectively managed.
  3. Control activities: Policies, procedures, and rules that ensure resources are safeguarded, such as accounting controls.
  4. Information and communication: Ensuring the right information is received by the right person at the right time.
  5. Monitoring: Reviewing and monitoring procedures to ensure deficiencies in systems and policies are corrected.

iii) Limitations of the PEFA Framework for assessing public financial management

  1. Focus on operational performance: PEFA focuses on the operational performance of key PFM system elements rather than all the various inputs and capabilities that may enable the PFM system to reach a certain level of performance.
  2. Lack of fiscal policy analysis: PEFA does not involve fiscal or expenditure policy analysis that would determine whether fiscal policy is sustainable.

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