Regulation of internal control system in pakistani banks Gaps in literature Prior Research on Internal Control Information Disclosure CHAPTER TWO

May 3, 2019 0 Comment

Regulation of internal control system in pakistani banks
Gaps in literature
Prior Research on Internal Control Information Disclosure
Literature review is vital part in the research work which provides the work is done by previous researchers on the topic and makes discussions relating to existing study. This section also contains the fundamental understanding about the selected variables. This Literature provides discussions on the effects of internal control system on organizational Effectiveness.

First subsection includes theories on which this study is related. This study is grounded on agency theory. Second subsection consists of reliability. And third subsection consists of internal control system and its dimensions which are Control Environment, Communication, Risk Management, Control Activities, and Monitoring. Fourth subsection consists of organizational effectiveness which is based on Goal Approach, Resource Control Approach, Multiple constituency Approach and Goal congruence.

Here is the short introduction of the variables
Internal control system:
“The plan of organization and all the methods and procedures adopted by the management of an entity to assist in achieving management objectives of ensuring as far as practicable, the orderly and competent perform of its production, including observance to organization policy, the protection of assets, prevention and detection of fraud and error, the accuracy incompleteness of accounting records and the timely preparation of reliable financial information” (Gupta, 2001) . Internal control system means all the policies, procedures, methods adopted by the management to ensure that everything is working in the organization as it should. There are five dimensions of internal control system that is control environment, communication, risk assessment, control activities and monitoring.

Control Environment:
The Control environment units the tone of an organization, influencing the manipulate recognition of its employees (Leung et al., 2011). It’s far the foundation for all other components of internal control, offering subject and shape. Manage environment elements include the integrity, moral values and competence of the entity’s humans; management’s philosophy and working style; the manner management assigns authority and obligation, and organizes and develops its employees
(Eldridge et al., 2013).Communication:
Communication is defined as the transfer of information from one source to another source.

The word communication is derived from the Latin phrase, (communis) which means not unusual. The definition suggests the reality that until a not unusual expertise effects from the trade of information, there’s no communication. (Lunenburg, 2010).
Risk Management:
At present, every business firms requires risk assessment to avoid and mitigate firm threat purposes. Risk administration framework comprises of manager’s style also as much philosophy, joined with benefits of the business strategy, Furthermore destination setting in operation. (Arena et al., 2010). The Risk management these days has moved from the entity region of the firm to the corporate cover the company. (Arena at al ., 2010, Power, 2009) .

Control activities:
Control policies and approaches: implemented in accomplishing a firm’s targets, safety of its property, and measurement of its performance (Elahi, 2013). Managers of the firms are responsible for the protections of assets. They should engage both manual and automated control systems.

Internal control techniques need to be frequently monitored. In speedy paced commercial enterprise environments, risks can evolve hastily. A well designed device needs to evolve and update as wanted (COSO, 2013). All policies and strategy which is made by higher executive should be monitored to check the performance over time.

Organizational Effectiveness:
An Orgainzation is effective if it’s far being able to meet its objectives problem to positive constraints and produce a favored impact without waste and with minimum expenditure of its resources. It’s about aligning  their Employees, the management structures, and the structure and skills (together with organizational lifestyle) to the method (Haid et al., 2010). Organizational effectiveness is theoretical concept so it is difficult to measure straight so in this research it is measured by various approaches.

Goal Congruence:
“Goal congruence is a situation in which people in multiple levels of an organization share the same goal. A well thought-out organizational design causes goal congruence and results in an organization being able to work together to accomplish a strategy” (Steven Bragg, 2017). Goal congruence is a state of affairs wherein humans in multiple stages of a business enterprise share the identical purpose. A well notion-out organizational design reasons Goal congruence and effects in a company being able to work together to perform a approach. This theory is very important about this research because in agency theory there is a conflict between shareholders and employees so goal congruence approach will helps us to reduce the conflict if higher executive and employees will face same goals then there will be less chances of conflict.

2.1.1 Agency Theory
Jensen and Meckling (1976) argued that managers and the interest of shareholders is not always on the same page in this case, at this time managers are try to achieve personal goals and not work for the maximizing the return of the shareholders .According to the theory agency costs are an effect of conflicts of interest and appear in terms of conflicts between the managers and owners of organizations.

According to Mill champ & Taylor (2008) lack of trust between shareholders and Employees are very common in every company. Shareholders want to keep on eye every particular activity of their employees. The primary principle is the basis for auditing professionals.

It’s far exemplified that, the most important (shareholders) may be sufficiently concerned that on the probability of being exploited by means of the agent (administrators and executives) that a dilemma can also stand up in hiring the right agents. The foregoing is necessitated by way of the preference to decrease or remove Agency costs. (Bebchuk ; Fried,2004).

According to Adams (1994) Agency theory not only help to discuss the presence of internal audit in firms but also help to discuss the features of internal audit like its size, control environment such as financial and operational control.

Company has a separate legal entity from its owners. Business is the separate thing and owners are the separate so shareholders will satisfy if internal control system of the company will be good.

2.1.2 Reliability theory
Reliability theory in accounting is that the financial reporting figures should be matched according in to the real .Financial statements figures should show a true and fair view in real. Internal control system helps us that figures should be matched with whenever audit will conduct. If internal control system of the banks is good then financial reporting will be more reliable.

According to Jenning (2008) reliability of financial statement is very significant for the shareholders because they used data for decision making.
The reliability of reporting is effective to internal control system performance to insure that the transactions of account bookkeeping are suitable and well legal, legitimate, successfully report, complete, and on time. Moreover, it’s miles very vital that Organizations are fairly summarized of accounting information facts disclosure. But, in popular, a quality reporting is tormented by internal control instrument. The Internal control is important corporate governance mechanism of the firm based on internal control statement fine that it need to be to govern effectiveness and also influences the reliability of financial reporting each in internal and external’s firm (Skaife et al, 2007)
According to Kopp and O’ Donell (2005) continuous improvement also effect on reliability of financial statement by all company’s employees . Generally internal control system is very important in every aspects of the business.

2.1.3 Contingency theory
“The management or optimized corporate organization is under pressure from internal and external factors” (Fiedler, F.E., 1964). The principle studies subjects in contingency, the state of affairs and corporation structure should be compatible with the intention to work properly in a corporation (Drazin, R. et al, 1985).

According to Donaldson, L. (2001) has an approach to contingency fully in organization theory, he accumulates three factors of the research model applied in internal control a) there is link between contingency features and Internal control structure; (b) contingency features determines Internal control structure; (c) there is a fit of the level of the Internal control structure to each level of contingency features.

This framework according to internal control system is different because of organization features and these differences are company dimensions, aims, governance ideology, and operational environment.
According to COSO (1992) et al ., presented the IC framework in which they stated that every company should select the most appropriate tools for internal control system in which Contingency features should be discussed. (Fisher, J., 1995; Chapman, C., 1997; Chenhall, R.H., 2003; Luft, J. ; Shields, M., 2003).For theoretical improvement, contingency theory  implemented in our studies because the idea of contingency theory shows that organizational effectiveness is related to corporate characteristics of contingencies (chenhall, 2003).

2.1.4 Internal control system
According to Hayes (2005) internal authority is consists of five elements that are the control environment, the Communication system, the risk Management procedure, the observation of controls and the Monitoring. Other researchers mainly focus on two or three elements of internal control system but this research is conducted for all elements of internal control system.

According to Meigs ; Meigs (1994) Internal control system all measures conducted by an organization for the purpose of protecting its assets against waste, Manipulation or Ineffective use, protect the reliability of financial statement data, securing conformation with management policies, estimation the performance of all employees, managers, and departments within the organization.

COSO defines
“Internal control as a process, affected by an entity’s board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations” (COSO, 2013).

The aim should appear on reporting that company has to recall how compliance high-quality can be achieved with reference to the enterprise performance. For one reason, at least, the corporation requirement is to appoint stakeholders to enforce and display structures for achieving financial reporting thru Internal control effectiveness. Company needs to entire an internal control device and the best of compliance monitored by supervisor. Consisting of all individuals of group of workers, audit committee, stakeholders, external auditor, and additionally internal auditors ought to be recommended to remark upon any subjects which can enhance the compliance best at the internal Control system effectiveness. (IIA, 2006).According to Qaisar Abbas ; Javid Iqbal (2012) It is a procedure which is planned particular to the organization that gives a sensible confirmation for accomplishing the targets of an organization influenced by an entity’s shareholders as well as board of executives, top-middle administration and other staff who are dependable to create internal control culture to preserve the adequacy and effectiveness of operations and complying the pertinent laws and controls that comes about minimizing the  wastage of assets and showing solid financial report which appears genuine and reasonable picture of the company’s monetary position to the partners and offer assistance them to make their best investment choices.

“Basle Committee on Banking Supervision” gives the definition of internal control system According to Chorafas, D.N (2001) Internal Control is a procedure which is influenced by the BOD, senior administration and all levels of individual. It is not exclusively a method or arrangement that is performed at a certain point in time, but or maybe it is persistently working at all levels inside the bank.

According to Thomas, P.D (2007) Internal control is the separation of the tasks, activities, strategies, and the efforts of the employees of a company control in USA working together to give reasonable guarantee that the company will obtain its objectives.

According to State Bank of Pakistan (SBP), financial advisors from all over the world have argued that the happenings of bank crisis are due to the collapse of internal control system. (Qaisar Abbas ; Javid Iqbal,2012).

“Internal control is a company’s framework, characterized and actualized beneath its duty which comprises a set of assets, designs of conduct, methods and activities adjusted to the person characteristics of each company which contributes to the control over its exercises, to the proficiency of its operations and to the productive utilization of its assets empowers it to take into thought, in an suitable way, all major dangers, be they operational, monetary or compliance”. (AMF Working Group, 2007).

Adebayo et al., (2009) they conducted a research to find out the relationship between the components of internal control in this research they find that if monitoring components of firm will be greater than there will be a highly efficient internal control system in firm . But in this research they focus only two components of internal control system which is monitoring and control activities.

Generally internal control may be very crucial to the reliability of financial reporting. Internal control should be powerful when inspecting layout can extraordinarily beneficial and is commonly for organization control and extensively to financial statements. Now every business uses a proper internal control system for protecting its assets and best utilization of its resources. Therefore, internal control should to be on a conventional premise assess in all angles in their company and embed inner controls in an exertion to meat up the company and increase profitability (Skaife et al., 2007).

Rokeya and Muhammad (2011) conducted a research study of internal control systems in firms in their research paper on “Evaluation of Internal Control Structure: Evidence from Six listed Banks in Bangladesh”. They found that all those banks where internal control objectives are met properly there variation regarding achievement of these is minimum.
Angella and Eno (2009) carried out a research on the topic of “”Evaluation of Internal Control Systems: A Case Study from Uganda” assess the internal control arrangement implemented by the members countries of African Development Bank for the function of management of Public sector project financing. This research paper evaluate that some components of internal control system are not properly applied.

Jianfei and Lu (2011) conducted a research the article was “Analysis of the relationship between listed companies’ earnings quality and internal control information disclosure”. In which they showed a positive relationship among the earnings quality and the stage of internal control system information disclosure. Its mean that better the company’s earning quality the greater level of internal control disclosure of information will be. In which they also argued that if internal control system will be good then company earning quality will also good.

Uket and Joseph (2012) conducted a research on “The impact of Internal Control Design on Bank’s ability to investigate Staff fraud, and Lifestyle and Fraud detection in Nigeria”. They conclude that the many banks of Nigeria don’t consider seriously the lifestyle and they also believed that effective internal control system will help them to discover the fraud.

The research of Olaoye (2009) “The impact of Internal Control System in banking sector in Nigeria” he want to check the accuracy and efficiency of internal control system in banking sector. He concludes that internal control has a significant impact on detecting manipulation and stops it in to the Nigerian banking sector.

Qaisar and Javid (2012) carried out a research on “Internal Control System: Analyzing Theoretical Perspective and Practices”. It was discovered that a well established and successfully implemented control system assists in proper utilization of resources and a framework for operations for every kind of organization. It was deduced that control systems generate reliable financial data which assist stakeholders in proper decision-making.

Emmanuel and Agyapong (2013) carried out a research on “Internal Control in small and Microenterprises in the Vhembe District, Limpopo province, South Africa” to find the productivity of internal control systems in the small medium enterprises (SMEs), in the Vhembe district in South Africa. As per result, the productivity of internal control systems in small business sector is completely low, just 45% of the sample firms have adequate control systems. They also conclude that small business must be motive for growth that they should established good internal control system.

The research conducted by Dr. Tamer and Dr. Daas (2013) title “Assess the extent of the application internal control elements evaluation and its effectiveness when doing Audit process- An analytical study on the Jordanian Banks auditors”. They suggest that management should aware the importance of internal control system assessment and they also recommend that the auditors should be scientifically and technically be eligible with all expertise which is necessary to implement the dimensions of internal control system effectively .
“Stakeholders perception on the effectiveness of internal control system on financial accountability in the Nigerian public sector” conducted by Babatunde and Shakirat (2013) aims to prove the perception that effective internal control system plays a vital role in ascertaining financial accountability, specifically in the Nigerian public sector. Results prove that there exists a significant correlation in the respondent’s perception that financial accountability is significantly affected by internal control systems and that application of penalty for violation of moral conduct impacts conformity with internal control.

The study was conducted in Pakistan by Dr. Zahid Ali Channar and Maha Khan (2015) “INTERNAL CONTROL EFFECTIVENESS & ITS RELATIONSHIP WITH FINANCIAL PERFORMANCE” Listed Banks in Hyderabad. They conclude that internal control effectiveness has a positive relationship with the financial performance of bank.

Mei Feng et al, (2009) conducted a research to find out the “the relation between internal control quality and the accuracy of management guidance”. In which they found that weak internal control system in a company tends to wrong internal management reports and less document guidance between companies reporting ineffective internal control.

Ho Tuan Vu (2016) conducted a research on “The Research of Factors Affecting the Effectiveness of Internal Control Systems in Commercial Banks-empirical Evidence in Viet Nam “. They argued that according to the COSO reports five dimensions of internal control system Control Envirnment, Communication, Risk Management, Control Activities, Monitoring can affected the effectiveness of internal control system in Banks. And also concludes that there are two more elements that can affect the effectiveness of internal control system in Vietnam : political institutions and interest groups.

Siyanbola and Oyebamiji (2016) carried out a research on the topic of” Role of Effective Internal Control Systems on Insurance Business Performance in Nigeria”. They find a positive relationship among the variables, they believe that internal control system has a main role on the efficiency of insurance business and they suggest that internal control should be compulsory for insurance companies. They were also suggested that company should hire qualified accountants and managers so they could manage the internal control activities in order to reduce the frauds and manipulation.

Olatunji (2009) conducted a research on the topic of “Impact of Internal Control System in Banking Sector in Nigeria” they found of inefficient internal control system is the main reason of bank manipulations in Nigeria. He also conclude that every bank should maintain a proper internal control system to get rid of fraud for the purpose to promote the continuity of works in a bank and to make sure the going concern concept, solvency and liquidity of the bank.

Miah and Mia, (1996) concluded from some research they said that the internal control system maintained by organization had significantly affect the increase of financial accountability in company. Internal control system also a significant effect on financial accountability in Government Company. (Miah and Mia, 1996)
Fawzi and Atala (2012) conducted a research to find out the relationship between the internal control dimensions and the effectiveness of audit program in Jordan “Internal Control and Audit Program Effectiveness: Empirical Evidence from Jordan”. They conclude that risk assessment highly affected to the performance of audit program and other dimensions of internal control activity had on affect on audit program performance.

Fanta, A.B. et al (2013) based agency theory to investigate the formation of corporate governance and its effect on the performance of banks in Ethiopia. the study conclude that the relationship b/w the internal control structure administration tools of the banks affects the performance of bank using return on equity (ROE) and return on assets (ROA) variables.

Objectives of internal control system
As per state bank of Pakistan (2004), there are three objectives of IC (Internal control) a) information objectives, b) performance objectives, c) compliance objectives. The purpose of the information objective is a lot of record accuracy and exposure. The performance objectives must emphasis the asset’s protection, and effectiveness in the management. The purpose of compliance is to ensure that the rules, regulations and internal policies should be implemented properly.

Internal control system is developed in organizations usually to
Decrease Wastage of resources
Protections of fixed assets
Control in errors and frauds
Less loss of income
unanticipated costs
2.1.5 Control Environment
Control environment alludes to all components which are convincing in deciding, expanding or diminishing the viability of approaches, strategies. Control environment stands out with the fundamental understanding received by senior administration of the organization to control the organization, its state of mind toward issues and approach to tackling issues and their viewpoint of the significance of ethical values. Entirely talking, control environment can be seen as an awareness of the senior administration of an enterprise to control the organization and workers (Kaval 2005).
The term ‘control environment’ issues the integrity, device of values and basic personnel’attitudes on control. Special burden is placed on the management philosophy,its leadership fashion and attitudes associated with the sharing and accepting of duty. (European Confederation of Institutes of Internal Auditing, 2007, p. 29).According to COSO (2013) it deals with the individuals and their work environment. It is vital for this environment to be created from the top down, administration’s behavior and attitudes.

Goodwin (2009) accepts that the control environment builds up the preference of the company by affecting the control mindfulness of the people. They moreover declare that control environment is known as the fundamental foundation for all the other elements of internal control. Control environment components are comprises of: trustworthiness and ethical values of laborers dependable for fabricating, overseeing and watching the controls, commitment and capability of people practicing obligations that one is relegated to, executives or assessment bunches especially the degree of their independence from administration, significance and encounter, administration thought and fashion of working in terms of their furiousness which might distinguish the degree of danger they confront and industrial structure, which could be a well-established structure that offers for right plotting, overseeing and checking capacities or an incompetent structure that might only supply in arrange to make perplexity among the fundamental players by making indistinct parts.

A few of the dimensions of control environment for this study are; company culture, ability levels, excellence of audit committees, Integrity and morals. (D’Aquila, 1998 ; Ramos, 2004).According to COSO model (1994, p.4) the control environment ‘sets the tone of an organization’, and affects the worker awareness of the control.

Setting up a solid control environment through exhibit of keenness and ethical values, suitable observing forms, the presence of satisfactory, separation of obligations and a sense of duty for accomplishing goals, influences the company’ capacity to resist internal and outside pressures (Committee of Sponsoring Organizations of the Treadway Commission, 2011, p. 26).

Ivana Barisic and Boris Tusek (2016) carried out a research on the topic of “The importance of the supportive control environment for internal audit effectiveness – the case of Croatian companies” They investigate the relationship between the control environment of internal control and internal audit effectiveness. According to the research consequences, within the case of a supportive control environment there is a chance that the internal audit will be effective. Their findings also showed that there is significant correlation between apparent internal audit effectiveness and higher level of control environment.

According to Onumah et al (2012) Internal control system showed a general low level of effectiveness. Five dimensions evaluate under internal control system, in which control environment showed a higher level of effectiveness.

Another research by Joseph, Ransome and Victoria (2012) titled “Effectiveness of Internal Control Systems of Listed Firms in Ghana” evaluate the effectiveness of internal control systems in firms listed on the Ghana Stock Exchange. They conclude that effectiveness of internal control system had medium performance levels, and overall not be considered as satisfactory. They also conclude that control environment showed the highest amount of effectiveness.

Sarens and Abdolmohammadi (2011) conducted a study to find out the connection between the control environment and size of internal audit division, the control environment characterized dignified manifestation of moral values, a high level of knowledge of controls and risks and their significance and clearly distinct responsibilities for internal controls and risk management.

Previous research studies have not greatly explored the correlation between the supportive control environment and the effectiveness of the internal audit. In an internal environment characterized by high awareness of controls and risk management it will be easier to understand the role of an internal audit with its monitoring task .2.1.6 Communication
The summary to COSO (1992) states, “Pertinent information must be identified, captured and communicated in a form and timeframe that enables people to carry out their responsibilities . Information systems produce reports containing operational, financial and compliance-related information that make it possible to run and control the business.”
Conversation systems represent the institution’s channels and strategies of conveying vital facts, regulations and directives. ( Robert ; Abbie 2003).

Information should be determined reliably from each outside and inside the company, to be knowledgeable and dealt with by way of people with functions in a well timed manner. Media information is to be communicated formally and allowed by using the board and employees to perform its obligations.Information and communication that allows to all employees to apprehend their function in the control system. Companies ought to be capable of put together accurate and well timed financial reporting, together with period in-between reports to record to managers to carry out complete duty and choice-making in a timely way. Ho Tuan Vu (2016).According to Steihoff. (2001) organization ensures that useful internal communications take place.

Consider the following :,
Top administration gives a clear message throughout the office that inside control responsibilities are imperative and must be taken seriously.

Employee’s particular obligations are clearly communicated to them and they get it the significant angles of internal control, how their part fits into it, and how their work relates to the work of others.

Mechanisms exist to allow the clean flow of facts down, across, and up the enterprise, and easy communications exist between practical activities, which includes among procurement activities and production activities.

Management communicates regularly with internal oversight organizations, such as senior management councils, and keeps them informed of overall performance, risks, essential tasks, and some other good sized events.

According to Hevesi, G (2005) organization should create communication channels that:
give timely information,
can be modified to individual needs,
tell workers of their duties and tasks,
allow the reporting of responsive matters,
enable staff to offer suggestions for progress,
give the information essential for all workers to take out their tasks effectively,
express management’s message that internal control responsibilities are vital and should be taken sincerely, and
Express and allow communication with outside parties.

Communication isn’t always an isolated internal control aspect. It influences each angle of an organization’s operations and makes a difference bolster its framework of internal control. The input from this communication arranges can offer assistance administration assess how well the different components of the system of internal control are working.

The research of Steihoff (2001) and Hevesi (2005), have revealed that communication is an important element that affecting the success of the Internal Control systems.

Proper information and communication can lessen the risk of fraud in approaches. First, the occurrence of fraud concealment is reduced via the integrity and the accuracy of data. To place it otherwise, someone who commits a fraud can’t have the opportunity of hiding it for a long time. Secondly, an open and effective communication fostered in a company, helps detecting the possibility of fraud earlier. (Cendrowski et al. 2007, p.128).

2.1.7 Risk Management
According to COSO (1992) Risk management is the identification of things or conditions that threaten the success of an entity’s goals and desires. It includes figuring out risks to the effectiveness and performance of operations, reliability of reporting, and compliance with legal guidelines and policies.  Changes in employees, new products positions, or rapid growth are some of the elements that would have an effect on a company’s risks. (Emmanuel &Agyapong 2013).According to Walker (1999), The managing of risks is the technique of alternate ought to be designed to restrict or reduce the risk, managers ought to observed any modifications to make sure that each risk management sustained when a modification occur. Line Managers must tell to the liable employees personally about any modifications in risk management. Managers should retain to monitor the elements that can have an effect on the chance can create new risks.
In these days, risk management is frequently perceived as a technology, requiring the use of vary sophisticated and complicated analytical equipment. However, having risk control plans based totally on quantified probability and effect can bring about the deceptive belief of taking manipulate of the company’s risks. In fact, the largest risk to business is often the failure to enforce a holistic, ”art and science”- based technique to risk management, mainly inside the fast changing environment where in most corporations now operate. (Schroeder, 2014).According to Little, A.D., (2013) Being a part of project management plans, they frequently regard risk management definitely as a paper exercising. As a result, these teams lose a possibility to bolster their tasks and deliver the excellent viable task effects.

The worldwide macro-monetary environment can add a combination of efficiency and complexity to commercial enterprise now days. Technology despite the fact that connecting us faster and less difficult,but adding an expanded threat in keeping the big volumes of information and retaining them steady. Regulatory necessities are growing, both in terms of quantity and of specificity. . Companies recognize that an effective risk control feature will most likely have a direct line to the top. As a end result, ninety six% of chance control proprietors now file at once to the CEO. Companies are also investing in body of workers and capabilities as part of their efforts to raise the risk management function (Accenture, 2013).

Kanyamon et al., (2011) conducted a research on the topic “How does internal control effectiveness create reliability of financial reporting? An empirical research on Thai listed firms”. Their findings showed that internal control effectiveness positively affect the financial reporting reliability. And also evaluates that risk management and monitoring highly affect the internal control effectiveness.

Qaisar and Javid (2012) conducted a research on “Internal Control System: Analyzing Theoretical Perspective and Practices” they found that if appropriately internal control system will implemented than company resources will not wastage too much and companies operations will be good. They also conclude that internal control system help out the organizations to less their risk and upgrade the reliability of Balance sheet to maintain a trust of shareholders.

Fawzi Al Sawalqa ; Atala Qtish (2012) carried out a research on the topic of “Internal Control and Audit Program Effectiveness: Empirical Evidence from Jordan”. The findings of this research shows that risk management add significantly in the direction of an effective audit program. They also conclude that other elements of internal control don’t contribute significantly. These findings showed that Jordanian organizations face less experience to deal with the tools of internal control evaluation.

As per this Act, banks are obliged to set up and perform a qualified and efficient internal control, risk management and audit unit that wrap all branches and institutions concern to consolidation. This unit is to reveal and manage the risks that banks are uncovered to and is to be compatible with the scope and structure of the operations and changing situations. (Banking Act No.5411, 2005: Article 29)
Whilst the banking system tends to enlarge in volume, its performance is risky, and plenty of risks get up and want to be resolved like bad debt, insolvency of banks. One of the urging strategic answers is to establish and improve internal control of banks. (Podpiera, R., 2006)
Siayor, A.D. (2010) conduct a research on the topic of “Risk Management and Internal Control Systems in the Financial Sector of the Norwegian Economy” . In which research used questionnaire to collect information about internal control and risk management. The findings showed that presence of internal control, particularly risk management sector, is vital in the Norway’s financial corporation. He also pointed that internal control is a tool to prevent and treatment of risks to achieve organization goals.

A study of Jin, J.Y. et al (2013) on the topic of “Impact of FDICIA Internal Controls on Bank risk taking”. They checked the impact of the bank’s internal control system before and during the financial crisis (2007 _2010). The results showed that the banks who had strong internal control system under FDICIA had the less risk than those banks which pleased the internal control necessities in the time period before the crisis (2000_2006). Moreover, those banks have been much less possibly to collapse and had less economic difficulties for the duration of the crisis.

2.1.8 Control Activities
Extent of work and performance of audit work significantly affect the communication portion of the internal control system whilst performance of audit work, qualified skills and objectivity is significantly affect the control environment element of internal control system. The administration of internal audit section, performance of audit work, audit program, audit reporting significantly affect the risk management elements of the internal control system. To end with, performance of audit work and audit reporting significantly affect the control activities (CA) elements of the internal control system. (Hanim et al. 2005).According to Buthayna et al. (2016) There are numerous control activities that managers can use to look the risks that make threats a company’s success. They can be grouped into 4 classes:
• Directive activities are used to guide a company towards its preferred goals. These take the form of laws, rules, guiding principle, policies and written processes.
• Preventive activities are designed to avoid the occurrence of an undesirable event. Their improvement includes predicting issues before they arise and enforcing ways to keep away from them.

• Detective activities are designed to identify unwanted events and alert management about what has took place. This permits management to take remedial action on time.

• Corrective activities are strategies that concentrate on unwanted conditions until they may be corrected. They’ll also assist in putting in tactics to prevent recurrence.

The documentation of a company’s system of internal control need to include the company’s structure, guidelines, control objectives, assessable gadgets, and control activities. The numerous elements of an internal control system may be represented inside the shape of policy and process manuals, and/or inside the form of flowcharts or matrices. (Levine, 1996)
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