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...ent, control activities information and communication and monitoring. We will now look to explain the five elements of internal control. Control environment This includes procedures that reveal attitudes as a whole of the senior management, directors and owners of companies regarding internal control and its importance. In the case of Nifty Construction the auditor should thus consider some significant subcomponents as a basis for assessing the directors' and managements' attitude and awareness of the importance of internal control. • Integrity and Ethical Values This concerns an entity's ethical and behavioural standards and how they are communicated and reinforced in practice for example to personnel through example, policy statements and codes of conduct. It can therefore be held that the managing director to an extent fails to adhere to this, as he maintains a 'close relationship' with creditor such as the customers and suppliers which if he were to act in the best interests of the company, would avoid. Moreover the operations director gives money on behalf of the company to staff to buy materials although he is not sure if this money is used for this purpose. In other words he issues cheques but has no account of it and also does not ask for receipts thus personnel may engage in 'dishonest, illegal or unethical acts'. • Board of Directors or Audit Committee Participation The board of directors in this case are independent of management and the members are involved in scrutinizing managements' activities. This board then delegates duties to management to provide regular assessments of internal control, therefore 'an active and objective board can often effectively reduce the likelihood that management overrides existing controls'. An audit committee is then created to assist the board to overlook the financial reporting aspect. It is hence clear that Nifty Construction being also a private company needs an 'effective audit committee' in analysing the companies financial reporting and internal control in the long run. • Assignment of Authority and Responsibility It is important to note 'formal methods of communication about authority and responsibility and similar control-related matters'. For example if anybody had the authority to spend or acquire assets at will the whole system would be shambles. In the case of Nifty Construction it is of relevance and importance since authorization to transactions in Nifty is given by many people. Risk Assessment This is the management's need to identify and analyse risks relevant to the preparation of financial statements, thus its relevant to companies which need to exercise control over their financial reporting .In Nifty Construction James Bore would therefore have to be in charge of this as it would be his duty to exercise such control since he is the financial director. However there seems to be gaps in his performance as the financial director. As a result it is of increasing importance that the management identify factors which may increase risk. In the case of Nifty Construction there was the failure to meet prior objectives as illustrated with the companies' setback in 2004. As a result there is a need to come up with possible actions which could be taken by the company in order to address these risks. Steps which could be adopted by companies to reduce risk are discussed in an article which highlights the issue of 'designing strategies for managing risk' and states the need to implement and integrate risk management along with 'measuring, monitoring and reporting'. It can be derived from this therefore that the management of Nifty Construction needs to assess risks as part of internal control to minimize errors and fraud. Control Activities In achieving the company’s objectives, policies and procedures which are known as control activities help ensure that the necessary steps are taken to reduce risks. More specifically: • Adequate separation of duties • Authorization of transactions and activities • Adequate documents and records • Physical controls over assets and records • Independence checks on performance Furthermore Physical control over records can be viewed as being an important factor of internal control as the operations director (Ted) in Nifty does not really keep records in the first place and if any they really are not protected since there are no backups or recovery procedures. Due to this the directors should focus on steps which they should take to avoid this in the event that they lose programs or data. Moreover there is no control over securing statements and the system which the company has does not have any top password control. Information and Communication This system is specifically used for the purposes of recording, processing, reporting and initiating companies’ transactions and thus account for assets. The directors in Nifty Construction stated that there...