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.
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