Question

In: Accounting

Discuss the concept of internal control in detail as per the lecture . ( importance ,...

Discuss the concept of internal control in detail as per the lecture . ( importance , need , principles , process )

Solutions

Expert Solution

Internal Control System in Auditing:

Introduction:

It is a part of control system in management. It is basic and most essential factor for efficient management. Internal Control helps management in controlling the transactions that may go ultra-vires to the organisation internally. It is also a system for administration of business transactions which is set to check the accuracy and promote efficiency though interal system. It is a plan where organisation is put on auto-pilot mode where every transaction within the organisation is cross-checked by itself.

Definition by AICPA, “internal control comprises of plan of organization and all the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data to promote operational efficiency and encourage adherence to prescribed management policies.”

In short, internal control includes accounting and administration controls installed by management to effectively run the business activities.

Main Purpose/ Importance: Internal control is designed, maintained and implemented to address identified business risks, that threaten the achievement of any of entity’s objectives that concern the entity’s -

  • Reliability of accounts
  • Efficiency of operations
  • Compliance with laws and regulations
  • Safeguarding assets.

Internal Control System has specific relation with entity and its environment.

Need of Internal Control:

To the Client

  • Providing reliable data: Every client, Internal Control helps in many ways. If all transactions are auto-checked through inernal control, accuracy increases. This will give reliable information for the client.
  • Safeguarding assets and records: Accuracy of data will stop interna theft, mis-use of data and assets. Thus, internal control safeguards assets and records.
  • To promote operational efficiency: Internal Control brings in discipline among the peers. They are constantly verified by other peers. They start working and reporting the right data that increases operational efficiency.
  • To ensure adherence to prescribed management policies: Management policies are prepared as ideal as possible. Thus, accurate dara, reliable data, true and fair view of financial statements etc. would bring in compliance with management policies which is possible through internal control system.
  • To ensure that all transaction carry out through proper authority: Internal Control is a system that makes every transaction through proper authority.

To the auditor

  • Helps to understand control system of client to plan audit: Planning for audit requires understanding of organisational structure first. Then, flow of transactions is also necessary for any auditor to plan for audit. Flow of transaction is understood through internal control system.
  • To determine if audit is possible, if yes, to determine the scope: While planning for audit, understanding of internal audit is necessary. This tells auditor if audit is possible in the given organisation beforehand. If audit is possible, auditor will know the scope and limitations of auditing.
  • It largely helps auditor to find errors and mistakes: Internal Control's first objective is to stop errors and mistakes. More the strong Internal Control is, less are the chances of errors and mistakes.

Conclusion: It all depends upon the Internal Control. First step in getting true and fair financial statements is to build a strong Internal Control System.

Elements / Principles:

  • Principle of Defining Responsibilities: In every organisation, responsibilities must be defined for every staff, employee and KMPs (Key Managerial Personnels). Segregation of duties must be done wisely.
  • Principle of Employee Rotation: Every employee in the capacity of same cadre must be allowed to rotate on periodical basis to restrict accumulation of knowledge at one place. Power is also accumulated if any KMP is kept at one position for longer time.
  • Principle of Documentation: Maintain Records, Financial and other Organizational plans for over a period as mentioned in the regulatory acts.
  • Principle of Supervision and Review: Constant supervision over employees and menial staff is necessary in order to get the work done within the time frame. Also, theft and other mis-behaviour could be stopped.
  • Principle of Authorization: Cash transactions must happen through a proper channel. Transactions involving greater cash must be channelized through board. Purchases must happen through authorized person only.
  • Principle of Separation: Accounting and Financial matters must be seen as an independent department and should not be connected with other departments such as Purchase, Sales, Inventory Stores etc.  
  • Principle of Internal audit: Internally, audit must happen on a periodical basis. That ensures early detection of errors and frauds.

Process of Internal Control System Building:

  • Control Environment: Controlling the internal environment of the organisation is necessary. Generating ethical and moral values among the staff is first step for developing internal control system. It also includes developing management and operational style, assignment of authority and responsibilities.
  • Control Activities: Once the environment is set, controlling it becomes the second step. It helps assessing the risks involved and performance reviews.
  • Information and Communication: To maintain accounting reliability, the information system should be developed. Communication process within the organisation must be set-up in order to define the reporting standards.
  • Risk Assessment: Risks involved must be assesses from time to time for all smaller parts of control system.
  • Monitoring: Monitor all the performance of internal control system that is developed. Assessment can be done by internal person or by an independent external auditor.

Conclusion: Internal Control System is necessary for client as well as for auditor. It ensures the reliability of accounting information and gains the trusts of all the stakeholders of the organisation.

Thumbs-up if this answer helps.

Comment below if clarification or more explanation is needed.

All the best !!


Related Solutions

Discuss the concept of internal control in detail as per the lecture . ( importance ,...
Discuss the concept of internal control in detail as per the lecture . ( importance , need , principles , process )
Discuss the concept of internal control in detail . ( importance , need , principles ,...
Discuss the concept of internal control in detail . ( importance , need , principles , process )
Discuss the concept of internal control in detail .( importance , need , principles , process...
Discuss the concept of internal control in detail .( importance , need , principles , process )
Discuss the importance of understanding internal control in developing an effective audit program. In that context,...
Discuss the importance of understanding internal control in developing an effective audit program. In that context, include in your discussion a general overall position and specifically the internal control questionnaires for either the Revenue and collection Cycle or Production (Inventory) Cycle, which also includes internal control over Inventory Transaction Processing. Matters such as seperation of duties should be part of your response. Include in your answer several (3 would be enough) important considerations to satisfy sound internal control for each...
importance, need and process of internal controls in detail.
importance, need and process of internal controls in detail.
In detail, discuss the theory and concept of strategic control. Provide examples and potential application for...
In detail, discuss the theory and concept of strategic control. Provide examples and potential application for the future. Discuss in detail and provide at least 2 additional references. 500 words
Define fraud and internal control in detail. Identify the principles of internal control and define them....
Define fraud and internal control in detail. Identify the principles of internal control and define them. Give suitable examples      
Whats the importance of internal control in regards to accounting? With some examples.
Whats the importance of internal control in regards to accounting? With some examples.
learn about the concept of Internal Control. This is the policies, procedures and practices that a...
learn about the concept of Internal Control. This is the policies, procedures and practices that a company puts in place to make sure that company assets are protected and that the company's accounting records are true and accurate. The material in the chapter that discusses the Sarbanes-Oxley Act emphasizes how important Internal Controls are and the penalties that can be imposed on a company for not following good internal control practices. Please answer the following questions regarding Internal Controls. Questions...
explain in detail the concept of risk and its importance how risk in the valuation of...
explain in detail the concept of risk and its importance how risk in the valuation of financial instruments
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT