Question

Why do we need internal control in an organization? What is its purpose, and what are its objectives (not components)? Can you explain with examples?

Answer 1

INTERNAL CONTROL - The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s
objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations, safeguarding of assets, and compliance with applicable laws and regulations. The term "controls" refers to any aspects of one or more of the components of the internal control

WE NEED INTERNAL CONTROL SYSTEM IN THE ORGANISATION TO REDUCE THE RISK OF FRAUD AND ERRORS

MAIN OBJECTIVES OF THE INTERNAL CONTROL SYSTEM IN THE ORGANISATION ARE

  Aims of Internal Control in relation to Financial and Accounting Aspects: Internal
controls relating to financial and accounting aspects are concerned with achieving the
following objectives -
(1) transactions are executed in accordance with management’s general or specific authorisation;
(2) all transactions and other events are promptly recorded in the correct amount, in the appropriate accounts and in the proper accounting period so as to permit preparation of
financial statements in accordance with the applicable accounting standards, other recognised accounting policies and practices and relevant statutory requirements, if any,
and to maintain accountability for assets;
(3) assets and records are safeguarded from unauthorised access, use or disposition; and
(4) the recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with regard to any differences.

For example : an auditor may perform a "walk-through" test that is, tracing a few transactions through the accounting system. When the transactions selected are typical of those
transactions that pass through the system, this procedure may be treated as part of the tests of control. The nature and extent of walk through tests performed by the auditor are such that they alone would not provide sufficient appropriate audit evidence to support a control risk assessment which is less than high.

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