Unit 3 : Internal Control

By RADHIKA

Internal ControlIntroduction:

Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization.

Meaning

It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organization's resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).

 

Definition

“Internal Control is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of a business, including internal check, internal audit and other forms of control.”

Internal ControlInternal control are the whole system of controls established by the management in order to carry out the business of organization in an orderly and an efficient manner, ensure adherence to management policies, safeguard the assets and secure as for as possible, the completeness and accuracy of records.

Internal checkInternal check is a part of internal control system. It ensures that all financial transactions are properly recorded. It also ensures efficiency of the accounting system followed by the organization and enables easy preparation of financial statements. It achieves its main object of minimizing errors and frauds. A sound system of internal check increases the reliability of financial statements. Internal check discourages fraud and collusion among employees by instilling

a fear of detection in their minds. Internal

check assigns responsibilities to persons

and enables maintenance of records and documents

properly and thereby ensures smooth flow of work.

Internal AuditAn essential part of internal control is the Internal Audit, which operates as a separate unit under the CEO and reports its observations to the Board of Directors. The Internal Audit supports the Group's management in directing operations by inspecting and evaluating the efficiency of business operations, risk management and internal control, and by producing information and recommendations to enhance efficiency. The Internal Audit also inspects

the processes of business operations and

financial reporting.

 

Nature Of Internal Control On behalf of the management performance of Audit staff… Internal control is exercise.. If the Internal Control is effective, it helps to the internal

auditor to select the sample size for conducting audit. If the Internal control is weak, auditor may decide to conduct

more extensive scrutiny of transactions. He may decide to place greater reliance on direct

confirmation by concern persons. Internal control is essential prerequisite for

efficient and effective management.

Cont. Every management should establish a system of internal

control appropriate to the size in nature of business of the entity.

The system of internal control extends beyond those matters, which relate directly to the function of the accounting system.

Scope Of Internal ControlInternal controls encompass a set of rules, policies, and procedures an organization implements to provide reasonable assurance that :

(a) its financial reports are reliable,

(b) its operations are effective and efficient, and

(c) its activities comply with applicable laws and regulations.

These represent the three main objectives of the

internal control system. The organization's board

of directors, management, and other personnel are

responsible for the internal control system.

Cont. Risk assessment

Control activities

Performance Reviews

The information and communication system

Monitoring

Cont. Internal Control classified in to two broad categories.

(i) Accounting control

(ii) Administrative control

Internal Auditing 

"Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes."

  

Cont.

Internal audit is an objective activity of security and consultation aimed to add value and improve the control system of the organization. In a world of increasing demand for transparency, personal responsibility and operational efficiency, the internal audit is a main pillar of advanced management as it assists to evaluate and improve the organization performance and management.

Characteristics1. Division Of Work

2. Provision Of Check

3. Use Of Devices

4. Self-balancing System

5. Change In Work

6. Specialization

7. Control

Objectives Of Internal Checki. To minimize the possibility of error, fraud and irregularity

ii. To prevent the misappropriation….

iii. To allocate duties and responsibility...

iv. To ensure an accurate recording of all business transaction.

v. To enhance the efficiency of the clerk in the organization.

vi. To exercise moral influence over the staff member.

vii. To prepare final account with an ease and efficiency.

viii.To detect errors and frauds promptly which

helps to minimize their effects in long term.

ix. To ensure the reliability of information produced

by the accounting system.

Essential Charteristics/Priciples Of A Good System Of Internal Check1. Responsibility

2. Completion

3. Rotation of employees

4. Automatic check

5. Reliance

6. Safeguards

7. Supervision

8. Formal sanction

9. Periodical review