Auditing
Auditing
INTERNAL AUDIT
INTERNAL CONTROL, INTERNAL CHECK AND INTERNAL
AUDIT
INTERNAL CONTROL
According to W.W.BIGG: Internal Control is best regarded as
indicating the whole system of controls, financial and otherwise,
established by the management in the conduct of a business,
including internal check, internal audit and other forms of control.
PURPOSE OF INTERNAL CONTROL
The objectives or purposes of Internal Control system is classified
in two types:
FROM CLIENTs POINT OF VIEW
FROM THE AUDITORs POINT OF VIEW
(A) FROM CLIENTs POINTOF VIEW:
Cost Benefit Analysis is applied by the management to assess and
select a particular method of control and its
applicability to the business conditions. The benefits which the
internal control system offers are:
a. Providing reliable data: Business decisions require accurate
information to run the business activities
efficiently. Examples of significant areas where management
requires reliable information are fixation of
selling prices, production directives depending on requirements
etc.
b. Safeguarding assets and records: The physical assets of a
company can be stolen, misused, or
accidently destroyed, if not properly protected by adequate
controls. The same is true of non-physical assets
such as accounts receivable, important documents (e.g.
confidential government contracts) and records (e.g.
the general ledger and journals). The safeguarding of certain
assets and records has become increasingly
important since, the advent of computer system. Large amounts of
information stored on computer media
such as magnetic tape can be destroyed permanently if care is not
SUPERVISION
AUTHORISATION
SOUND PRACTICES
INTERNAL AUDIT
ARTHIMETIC AND ACCOUNTING CONTROLS.
COMPETENT AND TRUSTWORTHY PERSONNEL
Personnel are the most important element of any system of
internal control. If employees are competent
and trustworthy, some of the other characteristics can be absent
and reliable financial statements can still
result. On the other hand, if the other characteristics of control are
strong, incompetent or dishonest people
can reduce the system to shambles.
RECORDS, FINANCIAL AND OTHER ORGANISATIONAL PLANS
Documents perform the function of transmitting information
throughout the clients organization and
between different organization. The documents must be adequate
to provide correctly recorded. For
example, if the receiving department fills out a receiving report
when material obtained, the accounts payable
department can verify the quantity and description on the
vendors invoice by comparing it with the
information on the receiving report.
SEGREGATION OF DUTIES
For the prevention of both intentional and unintentional error,
following types of segregation of duties
should be taken care of:
(i) Separation of Operational Responsibility from record-keeping
responsibilities: If each department or
division in an organization is responsible for preparing its own
records and reports, there would be a tendency
to bias the result to improve its reported performance. So in order
to ensure unbiased information, record
keeping is typically included in a separate department under the
controller ship function.
INTERNAL CHECK
It is an arrangement of duties of members of staff in such a
manner than the work performed by one
person is automatically and independently checked by the others.
According to F.R.M.De PAULA, Internal check means practically a
continuous internal audit carried on by the
staff it self, by means of which the work of each individual is
independently checked by other members of the
staff.
According to D.R. DAVAR, Internal check is a system or method
introduced with defined instructions given to
staff as to their sphere of work with a view to control and
verification of their work and also maintenance of
accurate records as the ultimate aim.
OBJECTIVES OF INTERNAL CHECK
1. To exercise moral pressure over staff.
2. To ensure that the accounting system produces reliable and
adequate information.
3. To provide protection to the resources of the business against
fraud, carelessness and inefficiency.
4. To distribute the work in such a business transaction is left
unrecorded.
5. To allocate duties and responsibilities of each clerk in such a
way that he may be held responsible for
particular fraud or error.
6. To minimize the chances of errors, frauds or irregularities in the
business based on the principle of division
of labour.
7. To detect errors and frauds easily if it is committed, because in
an efficient internal check system, there is
based on the principle of division of labour.
8. To detect errors and frauds easily if it is committed, because in
an efficient internal check system, there is a
provision for independent checking.
ESSENTIAL CHARTERISTICS/PRICIPLES OF A GOOD SYSTEM OF
INTERNAL CHECK
1. Responsibility: Responsibility of each individual must be
properly defined and fixed. The work of the
business should be allocated amongst various clerks in such a
manner that their duties and responsibilities
are clearly and judiciously divided.
2. Completion: The work should be divided in such a way that no
single person is allowed to complete the work
solely by himself from the beginning to the end. However, there
should be no duplication of work.
3. Rotation of employees: A good system of internal check should
not allow person having custody of assets to
have access to the books of account. A system of transfer or
rotation of employees from one seat of work to
anther must be followed by the business.
4. Automatic check: A good system of internal check must provide
for an automatic checking of the work of
one clerk by the other.
5. Reliance: No clerk of the business should be relied upon too
much.
6. Safeguards: Safeguards should be prescribed to keep un-used
cheque books, files and securities etc.
7. Supervision: A strict supervision should be exercised to ensure
that the prescribed internal checks and
procedures are fully operative.
8. Formal sanction: No deviation should be allowed from the
established procedures till it is formally
sanctioned by the top official.
9. Periodical review: the system of internal check be reviewed from
time to time to introduce improvements.
ADVANTAGES OF INTERNAL CHECK
Some of the widely accepted advantages of an efficient system of
internal check are as follows.
1. FOR THE BUSINESS
a. Proper division of work: Internal check entails a proper and
rational distribution of work among the
members of staff of the enterprises keeping in view their individual
xiii) At the end of the day, each counter salesman, cashier and the
delivery counter clerk should prepare
summaries of Cash Sales.
xiv) The cash sales summary prepared by the cashier should be
verified with the cash sales summary of each
salesman and the delivery counter clerk.
xv) The differences if any should be immediately enquired into.
xvi) If the summaries tally, accounts are certified as correct. Then
it is sent to the General Manager and
another copy is sent to accounts department.
xvii) Daily cash receipts should be deposited into the bank on the
same day.
xviii) Where cash recording machines are used, the total cash
received as shown by the machine should be
checked with the amount actually banked.
2> Sales by Travelling Salesmen: In big business houses, generally
Travelling salesmen are employed to push
sales and to collect debts. These Salesmen collect debts from old
customers and accept advances for new
ones.
Ordinarily debtors will be asked to send the remittances by post
and not to hand over the cash to any
representative of the enterprise. But in exceptional circumstances
travelling Salesmen may be permitted to
collect cash from the debtors. For example, where it is necessary
for enforcement of the terms of credit or
where refusal by travelling salesman to collect cash from a debtor
may be regarded as a bad policy.
Whatever the case may be, a good system of check over these
salesmen is vitally essential. So the following
precautions must be taken.
i. Travelling salesmen should be issued with pre-numbered, rough
receipt books.
ii. Final receipt against receipt of cash by travelling salesman
should be issued either from the branch or head
office to which the salesman is attached.
iii. Customers should be asked to contact the head office or branch
office if the final receipt is not mailed to
INTERNAL AUDIT
DEFINITIONS:
According to WATTER B. MEIGS, Internal auditing consists of
continuous critical review of financial and
operating activities by a staff of auditors functioning as full-time
salaried employees.
OBJECTIVES of INTERNAL AUDIT
To comment on the effectiveness of the internal control system in
force and to suggest ways and means
to improve upon the system.
To verify the correctness, accuracy and authenticity of the financial
accounting records presented to the
management.
To facilitate the early detection and prevention of frauds.
To ensure that the international accounting standards or the
standard accounting practices are followed
by the organization.
To take up an investigation at the special request of the
management.