Chapter 4-Internal Control, Internal Check and Internal Audit.pptx

Detailed about Internal control, internal check and internal audit.

1. AUDITING B. Com II, 2 nd Semester Institute of Commerce University of Sindh , Jamshoro Chapter 05 Internal Control, Internal Check and Internal Audit

2. Internal Control Internal control refers to the various methods and procedures adopted for the control of production, distribution and the whole system (financial and non-financial) of the enterprise. In other words, Internal control means all measures used by business to guard against errors, waste, and fraud and to assure the reliability of accounting data.

3. Features of Internal Control 1) It is the overall control adopted by the management. 2) It comprises of plans, methods and procedures for the effective control of the operations of the business. 3) It comprises of internal check, internal audit, accounting system and administrative control. 4) It is established by the management. 5) It intended to help the management to run the business efficiently.

4. Objectives of Internal Control 1) To ensure that transactions are recorded proper books of account. 2) See that all transactions are carried out only on account of a sanction of authority. 3) See that management policies and decisions are properly implemented. 4) To ensure efficient conduct of business. 5) To evaluate the efficiency of performance of the various personnel. 6) To safeguard the assets of the organization. 7) To safeguard the interest of the organization. 8) To ensure reliability of accounting records. 9) To ensure the periodical verification of assets.

5. Types of internal control Internal Control can be categorized as under: 1. Organizational An entity should have plan of organization which should define and allocate responsibilities, and identify the line of reporting. In all cases, the delegation of authority and responsibility should be clearly specified. An employee should always know the precise powers delegated to him, the extent of his authority and to whom, he should he report. 2.Segregation of duties A single person should not handle recording and processing of a complete transaction. Several persons should be entrusted with these works. Functions that should be separated are: initiation, authorization, execution, custody, issues of delivery order, and recording.

6. Types of internal control Internal Control can be categorized as under: 3.Physical This concerns physical custody of assets and involves procedures designated to limit access to authorized person only. Access can be direct or indirect. These controls are especially important in case of valuable, portable, exchangeable, or desirable assets. 4.By Authorization and Approval All the transactions should require authorization or approval by an appropriate person. The limits into these authorizations should be specified. For example, all credit sales must be approved by the credit control department or all overtime must be authorized by the works manager.

7. Types of internal control Internal Control can be categorized as under: 5.Arithmetical and Accounting This can be achieved through arithmetical accuracy of records, and checking of totals, reconciliations, control accounts, trial balance, accounting for documents and preview. 6.By personnel Procedures should be designed to ensure that personal operating system are competent and motivated to carry out the tasks assigned to them, as proper functioning of a system depends upon the competence and integrity of operating personnel. Measures include appropriate remuneration, promotion and career development prospects, selection of people with appropriate personal characteristics and training assignment of tasks to right levels.

8. Types of internal control Internal Control can be categorized as under: 7.By Supervision All actions by all levels of staff should be supervised. The responsibility of supervision should be clearly laid down and communicated to the person being supervised. 8.By management These control exercised by the management, which are outside and over and above the day-to-day routine of the system. They include overall supervisory controls, review of management accounts, comparison with budgets, internal audit and any other review procedures.  

9. Advantages of Internal Control A. Advantages to the business. 1)Provide accurate and reliable data to the management for taking correct decisions. 2) Ensure that policies and procedures are complied with. 3) Promotes operational efficiency & helps to attain organizational goal. 4) To safeguard the assets of the organization & to ensure the reliability of accounting records. B. Advantages to the auditors 1) Helps the auditor in framing the audit program. 2) To ascertain extent of test check can apply.

10. 1) It is Expensive. 2) Transactions of unusual nature may not be subject to internal control. 3) Human errors remain in any system of control. 4) Limitation of preventing frauds committed through collusion between persons. 5) It may not be keep pace with the change in the condition. Disadvantages of Internal Control

11. Internal Check Internal check is arrangement of the duties of staff members of the accounting functions in such a way that the work performed by a person is automatically checked by another. In other words, Internal check is and accounting procedure where routine entries for transactions are handled by more than one employee in such a way that the work of one employee is automatically checked by another for the detection of errors and irregularities.

12. Objectives of Internal Check Objectives of internal control can be set forth as under: To minimize the possibility of error, fraud and irregularity. To prevent the misappropriation of cash and goods To allocate duties and responsibility to every clerk in the organization so that, he may be held responsibility for their particular fraud & errors. To ensure an accurate recording of all business transaction. To enhance the efficiency of the clerk in the organization. To exercise moral influence over the staff member. To prepare final account with an ease and efficiency.

13. Advantages of Internal Check A. Advantages to business 1. Proper division of work 2. Fixation of responsibility 3. Greater efficiency of the staff. 4. Increased carrying capacity. 5. Early detection of errors and frauds. 6. Easy preparation of final account. 7. Truth and accuracy of accounting can be available. B. Advantages to Owners 1. Genuineness and accuracy of the account. 2. Overall efficiency, economy in operations, increased profit etc.. C. Advantages to Auditor 1. There is no need for detailed examination of book of accounts. 2. It reduces burden.

14. Disadvantages of Internal Check Internal check system is useful to every stakeholder of the business even though it has some disadvantages which are as follows:   1. Under internal check system, every staff wants to complete her/his work in time. So, s/he performs work in hurry which leads errors. 2. Under internal check system, once work is checked by another staff, the latter detects errors and frauds. So, there are chances of conflict between or among the staffs. 3. Small organizations cannot use internal check system because it needs more staffs which increases the cost .

15. Internal Audit “Internal audit refers to an independent appraisal(act of judging) of activity within an organization for the review of accounting, financial, and other business practices”. It consists of continuous and critical (involving careful judgment) review of financial and operating activities by the staff of auditors functioning as a part of management and reporting to it and not shareholders. It involves regular and critical analysis of the functions of an organization, for the purpose of recommending improvements. It is aimed at assisting members of the firm in discharging their responsibilities in an effective manner.

16. Objectives of Internal Audit To check the accuracy and authenticity of the accounting records. To identify whether the standard accounting practices, which are deemed to be pursued by the entity, are complied with or not. To ensure detection and prevention of fraud. To examine that there is an appropriate authority for the procurement and disposal of assets. To verify that the liabilities are incurred only for business causes and not for any other purpose. To review the activities of the internal control system, so as to report management regarding deviations and non-compliances.

17. Advantages Internal Audit The advantages of internal audit are as follows:  1. Staffs remain alert because their work shall be checked by the internal auditor. So, accounting remains correct. 2. Internal audit helps to detect errors and frauds and provides suggestions to improve them which help the management to take corrective action. 3. Internal audit detects the misuse of resources in time which helps to reduce unnecessary expenses. 4. Internal audit checks the efficiency of staffs which helps to increase the efficiency of them. 5. Internal audit checks the books of accounts, detects errors and frauds and helps in its correction which makes the act of final auditor easier. 6. Internal audit increases the morale of honest staff because evaluation of performance of any staffs will be made at any time.  

18. Disadvantages Internal Audit Internal audit suffers the following limitations: Internal audit is not possible to be adopted by small organizations because the cost of running an internal audit department is very high. Internal audit department employees are the paid-staff of the organizations. In most cases, they do have to work accordingly to the directions of the management. So it not expected that they will provide unbiased opinion on financial statements. As there is no prescribed qualification for the appointment for internal auditors, less qualified persons may get appointment in the department. They will not able to discharge their duties properly.

19. It can be seen from above discussion that both internal check and internal audit that they are parts of overall control system.

20. DISTINCTION BETWEEN INTERNAL CONTROL INTERNAL CHECK AND INTERNAL AUDIT

21. DIFFERENCE BETWEEN INTERNAL CONTROL, INTERNAL CHECK AND INTERNAL AUDIT Internal Control Internal Check Internal Audit It is the whole system of control established by management. It is the arrangement of accounting work under which the work of one person comes under another. Continuous review of records by staff appointed for the purpose. Scope is more. Scope of internal check is less. Scope of internal audit is less that of internal control wider than internal check. The objective is to safeguard the asset of enterprise. Objective is to locate errors and frauds. The object of internal audit is to assure the management that the system of internal control and internal check in operation are in effective in design and operation.

22. Internal Control Internal check Internal audit There is no separate staff. There is no separate staff. It is conducted by the staff specially appointed for the purpose called as internal auditor. Internal control is exercised when the work of employees in progress. Internal check is exercised when the work of employee is in progress. It is undertaken by the auditor after the work has been completed. Any organization can adopt internal control. Any organization can adopt internal check. Internal audit is adopted only those concerns which really need it.