AUDITING - INTERNAL CHECK, INTERNAL CONTROL & INTERNAL AUDIT INTERNAL CONTROL, INTERNAL CHECK AND INTERNAL AUDITINTERNAL CONTROLAccording to W.W.BIGG: Internal Control is best regarded as indicating the whole system of controls, fnancial and otherwise, established by the management in the conduct of a business, including internal chec, internal audit and other forms of control.!PURPOSE OF INTERNAL CONTROL"he ob#ecti$es or %ur%oses of Internal Control system is classifed in two ty%es:&'() C*I+,"-s .(I," (& /I+W&'() "0+ A12I"('-s .(I," (& /I+W(A) FROM CLIENTs POINTOF VIEW:Cost Beneft Analysis is a%%lied by the management to assess and select a %articular method of control and itsa%%licability to the business conditions. "he benefts which the internal control system o3ers are:a. .ro$iding reliable data: Business decisions re4uire accurate information to run the business acti$itiese5ciently. +6am%les of signifcant areas where management re4uires reliable information are f6ation ofselling %rices, %roduction directi$es de%ending on re4uirements etc.b. 7afeguarding assets and records: "he %hysical assets of a com%any can be stolen, misused, oraccidently destroyed, if not %ro%erly %rotected by ade4uate controls. "he same is true of non8%hysical assetssuch as accounts recei$able, im%ortant documents 9e.g. confdential go$ernment contracts: and records 9e.g.the general ledger and #ournals:. "he safeguarding of certain assets and records has become increasinglyim%ortant since, the ad$ent of com%uter system. *arge amounts ofinformation stored on com%uter mediasuch as magnetic ta%e can be destroyed %ermanently if care is nottaen to %rotect them.c. "o %romote o%erational e5ciency: "he controls within an organi;ation are meant to %re$entunnecessary du%lication of e3orts, %rotect against waste in all as%ects of the business, and discourage otherty%es of ine5cient use of resources.d. "o encourage adherence to %rescribed %olicies: "he system of internal control is meant to %ro$idereasonable assurance that %rocedures and rules of the $arious institutes are followed by com%any %ersonnel.(B) FROM AUDITORS POINT OF VIEW:"he study and e$aluation of the client-s system of internal control is im%ortant to auditors. "he auditorsmust ha$e a thorough understanding of the system. A bird-s eye8$iew of the controls fail to meet the standardof due care. "here is a di3erence between the system that is su%%osed to be in o%eration and the one actuallybeing used. 7im%ly by asing certain 4uestions, re$iewing of the organi;ation chart and studying a few%rocedure manuals to obtain an understanding of the system is not su5cient. ,o doubt, these are im%ortant%arts of re$iewing the system, but to obtain an ade4uate understanding the system must also be tested."here are two ways in which the study and e$aluation of the clientation in %rofts: Goods %urchased may not be entered in the %eriod so as to in>ate %rofts.i$. Artifcial reduction in %rofts: Goods not recei$ed in one %eriod may be entered as %urchases so as to show%rofts less than the actual.I,"+',A* C0+C? WI"0 '+GA'2 "( WAG+7"he system of internal chec for wages should be de$ised in a careful and %lanned way, s%ecially inmanufacturing concerns, em%loying large number of worers, %ossibilities of frauds are always there. "huse3orts should be made to %re$ent such frauds with the hel% of some suitable arrangements of internal checwhich should be re$ised from time to time in the light of e6%erience gained. 7ystem should be acti$ely enforcedand su%er$ised by some res%onsible o5cial."he (b#ecti$es"o a$oid inclusions of dummy worers in the list of worers."o a$oid incorrect time or %iece wor records."o a$oid fraudulent mani%ulation of wage8sheet and misa%%ro%riation of money etc."o minimi;e such frauds, the following system of internal chec forwages is suggested.)AI,"+,A,C+ (& WAG+ '+C('27B. "I)+ '+C('27: Worers are %aid their wages normally on the basis of time. "hus the time s%ent by eachworer should be correctly recorded in the time record boo and for this %ur%ose the following methodsare in %ractice.a. "0+ "I)+ '+C('2I,G C*(C?: "he time recording cloc is %laced at the gate under the charge of a timeee%er.As soon as worer enters the gate, the time ee%er inserts his timeinto the cloc which recordsthe time. It is recorded when the worer lea$es the factory.b. B'A77 "(?+,: "he worers are gi$en brass toen bearing their numbers. At the gate, a time board ismaintained on which each worer hangs his toen as soon as he enters in the factory. "he time ee%er isthus able to record the time of worers entering the factory. 0e should be $igilant enough to see that noworers hang the toen of others who are late or absent.c. A""+,2A,C+ CA'27J.1,C0I,G )AC0I,+: +ach worer is %ro$ided with a time card with his name,number, de%artment and wages rate mentioned on it. 0e should %unch card at the time of his arri$al andde%arture. "he %unching or card must be su%er$ised by the time8ee%er. &oreman of each de%artmentshould also be ased to ee% the time records of his worers. "he time ee%er and foreman shouldse%arately %re%are the time records and the name of absentees atthe end of the day.d. C().1"+'7: "his method is the most %o%ular method now es%ecially with the multinationals. Anidentity card is issued to each worer and when the em%loyee enters the factory and lea$es the factory, he%uts his identity card in the slot of the time recording machine. "his machine is controlled by thecom%uter. 7o the com%uter records the time the em%loyee s%ends in the o5ce. Another ad$antage of thismethod is that only with a %ro%er identity card, the em%loyee can enter the o5ce. "hat is only if theidentity card is the authori;ed one, then only the door will o%en forthe em%loyee.C. .I+C+8W('? '+C('27: Where the worers are %aid on the basisof the wages system, %ro%er hoos foractual wor done by worers should may be maintained. +ach worer should be %ro$ided ith a #ob card or%iece wor return form bearing his name, hob number, nature of worer should be recorded on this cardwhich should be countersigned by the foreman of the de%artment. 7tore8ee%er to whom the goodsmanufactured are handed o$er, should sign this card. It should be fnally checed by %iece wor re$ieweralong with 4uality of goods.D. (/+'"I)+ '+C('27: (rdinarily o$ertime wor should not be encouraged. ,o worer should be allowed towor o$ertime unless he is authori;ed to do so by the authori;ed o5cial of the organi;ation. 7trict checmust be e%t on loiterers at the %lace of wor. ($ertime sli%s should be sanctioned in ad$ance. 7uch sli%sshould bear the name and number of worer, o$ertime %ut in the #ob or the de%artment in which he isengaged. At the weeend such sli%s should be sent to the de%artment in and the #ob or the de%artment inwhich he is engaged. At the weeend such sli%s should be sent to the time8ee%er who will forward themto the wage o5ce.E. .A778(1" '+C('27: "he worers should not be allowed to lea$e the factory before the scheduled time.But if sometimes, a worer wants to go out of the factory on his %ersonal wor during woring hours heshould not be allowed to go out of the factory %remises without obtaining %ermission from authori;edo5cial who should issue %ass8out sli%s. 7uch sli%s are handed o$erto gateee%er wage o5ce should alsobe gi$en co%y of such sli%s. In case a worer lea$es the factory before time on his own account, it should be%ro%erly accounted.F. .'+.A'A"I(, (& WAG+ 70++"7: "he %re%aration of wage sheets should be done by a se%aratede%artment. "his wor should be done by f$e clers to minimi;e the irregularities. Information regardingattendance can be had from the attendance register, #ob cards, %iece wor register, o$ertime sli%s, %ass outsli%s etc,. &or time worers and %iece rage worers, se%arate wagesheet should be used. In big factoriesloose wage sheet should be used so that the wor may be distributed amongst $arious clers easily.All the essential %articulars should be entered in the wage sli%s which should ha$e columns for:B: ,ameC: ,umberJcode number allotted to him and his addressD: "otal time woredE: 2etails of wordF: 'ateG: "otal amount of wagesH: BonusI: ($ertime, if anyK: 2eductionsBP: ,et amount %ayable"he whole wor is to be di$ided in $arious %arts to be done by se%arate clers in the wage de%artment.i. "wo clers should e6amine the time and %iece wage records, o$er time records and other statementsrecei$ed from the foreman.ii. "he third cler is to %re%are indi$idual em%loyee statement i.e., name of the worer, code number allottedto him and his address, total time wored and rate of wages.iii. "he fourth cler is to chec the calculations and deduct the %ermissible amount i.e. rent, %ro$ident fund,income ta6, installment of loans and other %ermissible deductions under the .A=)+," (& WAG+7 AC",BKDG. &rom the gross wages to arri$e at the net amount to be %aidto the worers.i$. "he ffth cler is to chec the whole wor thoroughly.$. All these clers should initial the wage sli%s before these are signed by some res%onsible o5cer, such asdirector or wors manager..A=)+," (& WAG+7B. "he clers associated with the %re%aration of wage sheets must not be associated in the %ayment ofwages to a$oid collusion between two or more %ersons.C. "he cashier should be entrusted with the #ob of disbursement ashe is not associated with the%re%aration of the wage sheets.D. +ach worer, who is to recei$e the wages, should be %resent.E. "he foreman or concerned o5cer of each de%artment should be%resent at any sort of im%ersonationfor worers who are absent.F. Where %ossible, the signature of the worers, should be obtained when they recei$e the amount ofwages. But in case the number of worers is $ery large and it is not feasible to obtain the signature ofeach worer, the whole %ayment should be attested by those %resent i.e., cashier, foremen and theworers manager.G. If casual worers are also em%loyed in the organi;ation a se%arate list of such worers should be%re%ared and the %ayment should be made to them in the %resence of a res%onsible o5cer. "o a$oidfraud, the o5cer em%loying casual labour should not be connectedwith the %ayment of wages.(therwise, the names of dummy worers can fgure in the wages ifnecessary %recautions are not taenby the wors manager.H. .ro%er arrangements should be made with regard to unclaimed wages.I. Ad$ances to the wormen should be discouraged and if it becomes una$oidable they should be gi$enand these should later be deducted from the wages of the res%ecti$e worers.I,"+',A* C0+C? WI"0 '+GA'2 "( 7"('+7 97"(C?:"he 7tores 2e%artment has the charge of %reser$ing and issuing stores to di3erent de%artments..ro%er control of stores is $ery much essential to %re$ent %ilferage9small theft: and misuse. "herefore, theinternal chec system in relation to stores must be gi$en careful attention."he following general rules may be followed to ensure e3ecti$e chec on the stores.i. *(CA"I(, (& 7"('+7: 7tore should be located at a con$enient %lace. It should ha$e %ro%er stores facilitiesso that goods may not be mis%laced, misused or wasted.ii. '+C+I."7 (& 7"('+7: (n recei$ing stores, the 7tores 2e%artment will %re%are a Goods 'ecei$ed ,ote- intri%licate.(ne co%y will be sent to the .urchase 2e%artment.7econd co%y will be sent to Accounts 2e%artment."he third will be retained by the 7tores 2e%artment itself.All the details about stores should be noted on the note. 7tores should be %ro%erly checed after their recei%t.iii. .'+7+'/A"I(, (& 7"('+7:Goods recei$ed should be stored at their allotted racs."he system of Bin Cards should be used to show the recei%ts, issues and balance of stores. 7uch Bin Cardsmay be e%t hanging on the %laces where stores are %reser$ed. 7tores in$entory software may be used oncom%uter for item stored.i$. I771+ (& 7"('+7: ,o item from the stores should be issued to any %erson without formal re4uisition ordemand note from some authority. (nly authori;ed %erson should be allowed to remo$e articles from thestores according to the re4uisition. "he 7tores (5cer should be seated near the gate so that all issuesmay be made under his su%er$ision. &or the materials or stores returned from the #ob or the de%artment.)aterial return note should be written and %ro%erly accounted for. *iewise, )aterial "ransfer ,otesshould be used for the materials transferred form one de%artment or #ob to another. "he gate ee%ershould be instructed not to allow any material out of the factory without necessary %ermit from the 7tore8?ee%er or In$oice of 7ales 2e%artment.$. '+C('2I,G: After the issue of materials from the stores, the 7tore Issue 'e4uisition should be sent to the7tores Accounts 7ection for %ro%er records there. "he Bin Cards should be checed out com%ared fromtime to time with stores records.INTERNAL AUDIT2+&I,I"I(,7:According to WA""+' B. )+IG7, Internal auditing consists of continuous critical re$iew of fnancial ando%erating acti$ities by a sta3 of auditors functioning as full8time salaried em%loyees.(BA+C"I/+7 of I,"+',A* A12I""o comment on the e3ecti$eness of the internal control system in force and to suggest ways and meansto im%ro$e u%on the system."o $erify the correctness, accuracy and authenticity of the fnancialaccounting records %resented to themanagement."o facilitate the early detection and %re$ention of frauds."o ensure that the international accounting standards or the standard accounting %ractices are followedby the organi;ation."o tae u% an in$estigation at the s%ecial re4uest of the management."o ensure that the assets of the organi;ation are ade4uately safeguarded and %ro%erly accounted for."o ensure that the organi;ation incurs liabilities in res%ect of its $alid legitimate acti$ities."o ensure that the ac4uisition and dis%osal of assets are under %ro%er authority."o ensure as to whether or not each unit of the organi;ation follows the %olicies and %rocedures as laiddown by the to% management.I,"+',A* C0+C? /s I,"+',A* A12I"7imilarities: Both Internal Chec and Internal Audit are %art of the whole system of internal control, assuch both are com%lementary and go together.2issimilarities: "here is a lot of di3erence bJw Internal Chec and Internal Audit. Both di3er from eachother in the following res%ects.a. )eaning: Internal Chec is an arrangement of duties allocated in such a way that the wor of one %erson isautomatically checed by another. Internal Audit is an inde%endenta%%raisal of the o%erations and recordsof the com%any.b. (b#ect: the %ur%ose of Internal Audit is to detect the errors and frauds which ha$e already beencommitted.i. "he %ur%ose of Internal Chec is to %re$ent or minimi;e he %ossibilities of errors, frauds orirregularities.c. ,eed for se%arate sta3: for carrying out Internal Audit, a se%arate sta3 of em%loyees is engaged for the%ur%ose.&or internal chec, no new a%%ointment is made. It, in fact re%resents only the arrangement of duties ofthe sta3 in a %articular way.d. ,ature of wor: the wor in$ol$ed in the Internal Audit is #ust lie that of a watch man. Internal auditor hasto re%ort, from time to time, to the management about the $ariousin e5ciencies and suggestim%ro$ements. It is also his duty to see that the internal chec system does not become static.Internal Chec, on the other hand, re%resents a %rocess under which the wor goes on uninterru%tedly and the checing too is more or less automatic.e. "iming of wor: Internal Audit starts when the accounting %rocess of di3erent transactions is fnished. Internal Chec is an o%eration during the course of transaction.f. Internal audit: It is a de$ice for checing the wor, whereas internal chec is a de$ice for doing the wor.g. In Internal Audit +rrors and &rauds are detected after the com%letion of wor, whereas in Internal Chec the +rrors and &rauds are disco$ered during the course of wor.h. 7co%e of wor: "he sco%e of Internal Chec is $ery limited. "he sco%e of Internal Audit is com%arati$elyboard.i. In$ol$ement: A large number of em%loyees are needed for the im%lementation of Internal Chec 7ystem.Whereas, a much smaller number of %ersons are needed for im%lementing Internal Audit im%lementation.