INTERNAL CONTROL SYSTEM ACM- 301

Presented by:

Hina Varshney B.Com III sem

12D012

Definition

Internal controls is defined as not only internal check & internal audit but the whole system of controls, financial & otherwise, established by the management in order to carry on the business of the company in an orderly manner, to safeguard its assets and secure as far as possible accuracy and reliability of the records.

The definition involves following feature :

A whole system of control Financial control Non-financial control Management Records

Elements Plan of organization: There should be an

appropriate plan & structure of the organization for internal control. There must be proper division of various financial responsibilities. Delegation of authority should be taken up with responsibility so that the person concerned should effectively & efficiently discharge his responsibility.

contd.

Elements Authority & responsibility: There

should be proper balance between authority and responsibility so that accountability should be properly fixed. As far as possible duplication of duties & responsibilities should be avoided. The duties of various individuals should be divided to provide a reasonable guard against irregularities & falsification of accounts by any one individual.

contd.

Elements Sound practices & healthy traditions:

For a good internal control system, there should be sound practices & healthy tradition in an organization. There should be effective and efficient internal control system in all important accounting functions.

contd.

Elements Quality Personnel: Personnel of

necessary competence make internal control system effective. Only efficient personnel can carry out prescribed procedures in efficient manner.

System of authorization & record procedure: The system of internal control ensures reasonable accounting control over assets, liabilities, revenues & expenses.

Characteristics There should be a well developed plan of

organization. The organization certain delegation of proper

responsibilities. There should be a well developed accounting

system. Account system or its procedure should be

based on proper controls over capital & revenue.

The performance of duties should be measured at every level.

Objectives To follow the policies & procedures laid

down by Management: Various control

techniques such as time & motion study, comparison of budgeted & actual figures, performance appraisals etc. designed to enable the management to ensure adherence to its policies & procedures.

cont.

Objectives Safeguarding of Assets: The second

objective which internal control system should try to achieve is safeguarding as assets from theft unauthorized used, accidental destruction & any such occurrence. Limiting access to valuable & portable assets, inventory, small tools, periodic physical inspection of inventories are some of the ways to safeguard the assets.

cont.

Objectives Prevention & detection of Frauds & Errors:

A well designed internal control system should provide for prevention & detection of frauds & errors. Strict documentation requirement encompassing pre-numbering of documents, limiting access to unused documents & periodic examination of numeric sequence of used documents, are examples of some means through which the objective is achieved.

cont.

Objectives Timely preparation of Reliable Financial

Information: Internal control system should be designed keeping in mind the timing of information required as per the applicable laws and needs of the management.

cont.

Objectives Accuracy & Completeness of Records:

Records are physical evidence of executed transactions. The term accuracy & completeness of records implies:

Information in the records is in compliance with applicable laws & regulations.

No error & fraud exit.

Importance Internal control is the overall control

environment established by management of an enterprise for effective & sufficient monitoring & control of its operations.

If internal control is effective, the auditor may confine his examination & audit procedures only to a representative number of transactions & avoid a detailed verification of every transaction which will be costly both in terms of money & time.

Limitations High cost of implementation: Management of a

small company may not establish internal control system due to high cost of implementation. It is suitable only for big business houses.

Potential of human error: the potential of human error due to employee carelessness, misunderstanding of instructions & errors in judgment have an impact on the effectiveness of internal control system.

cont.

Limitations Possibility of collusion: One of the

fundamental principles in the design of an internal control system is the segregation of duties of employees. If two or more employees recording different aspects of transaction collude, the effectiveness of internal control system will be compromised.

cont.

Limitations Misuse of authority: It is possible that a

person who is exercising control could misuse the authority. For e.g. a shopkeeper having keys of warehouse, may take away goods for his personal use.

Manipulation by management: The internal control system is devised & maintained by management. Manipulation in accounts & misappropriations perpetuated by members of management.

Reference Dr. B.K. Mehta Anamika Mehta Dei study material Auditing: Kumar