Question

Define fraud and internal control in detail. Identify the principles of internal control and define them. Give suitable examples

     

Answer 1

Fraud and Internal Control

Internal Controls are processes and records that ensure the integrity of financial and accounting information and prevent fraud. They are the policies and procedures put in place by management to safeguard assets, promote accountability, increase efficiency, stop fradulent activityand behaviour.It is a process put in place to prevent employees from stealing assets or committing frauds.

Frauds and related misconduct prohibited by the policy generally involves a wilful or deliberate act or failure to act with the intention of obtaining an unauthorized benefit.Such acts include but are not limited to , making or altering documents or computer files with the intention to defraud.

Principles of Internal Control

1. Segregation of duties --It requires that different individuals be assigned reponsibility for different elements of related activity, particularly those involving authorization, custody, book keeping. Eg-Same person who is responsible for asset's book keeping records should not be responsible for physical control of asset.

2. Proper Authorization-of transactions and activities help to ensure that all company activities adhere to established guidelines unless responsible managers authorize another course of action Eg--A Fixed price list may serve as an official authorization of price for a large sales staff.

3. Adequate Documents and records-----provide evidence that the financial statements are accurate. Eg--Creation of Invoices, timely preparation of documents.

4. Physical control over assets and records protects the co's assets. Eg--Cash registers, Employee ID Cards

5. Independent check on performance which are carried out by employees who did not do the work being checked help ensure the reliability of accounting info efficiency of info. Eg-supervisor verifies the accuracy of retail clerk's cash drawer