AUDITING

Professor Incharge:- SATINDER MAM

TOPIC: -

1) INTERNAL CONTROL 2) INTERNAL AUDIT 3) INTERNAL CHECK

GROUP DETAILS
Member1: - Shraddha Tambe Member2: Member3: - Manoj Singh Member4: - Anil Kumar Member5: - Shrikant Umbarkar

SITE USED:1. www. Bzupages.com

BOOK USED (BIBLIOGRAPHY):1. Techniques Of Auditing Author: Sandeep Gupta Sachin Bhandarkar

INTRODUCTION
Business is complex process and in recent times has become even more complex matter with the advancement of technology in every field. There is an optimum utilization of resources and opportunities. For maximization of profits and survival in the competition. Because of this emerges the heal of controls. All the operations of a business are carried on with the help of human agents and equipment. Therefore, Supervision is needed. So that taken assigned to them. Carried out properly and avoidable wastes and losses do not occur or can be reduced in the business. Human behavior is such that it is not subject to some regulation of control, it tends to depend from the proper path. It needs to be kept under systematic watch not only for ensuring that the employee is walking but also etc ensure that he is making in the proper manner as required for the laid down purpose.

DEFINITION: According to AAS-6 (Revised entitled Risk Assessment and Internal Control, Internal Control is defined as The plan of organization and all the methods and procedures adopted by the management of entity to assist in achieving managements objectives of ensuring, as far as practicable, the orderly and its efficient conduct of its business, including adherence to management policies, the safeguarding of assets, prevention and detection of error and fraud, the accuracy and completeness of the accounting records, and timely preparation of reliable financial information. The system of internal controls extends beyond those matters, which relate directly to the functions of the accounting system. The internal auditor functions constitute a separate component of internal control with the objective of determination whether other internal controls are well designed and proper operated.

Types:An internal control is not limited only to the accounting system. Internal Controls can be classified in to two broad categories: (i) (ii) Accounting Controls, and Administrative controls.

Accounting Controls are the controls, that are related to the accounting System. AAS-6 lays down following objectives of Accounting Controls/internal Controls. They should check whether: (1) (2) (3) (4) Transactions are recorded in accordance with managements general or specific authorization. All Transactions are promptly recorded with correct amount in the appropriate accounts in the accounting period in which it is executed. Assets are safeguarded from unauthorized access, use or disposition. The recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken for the differences.

Administrative Controls are internal controls other than accounting controls.

Duties of Auditor relating to Internal control: In Large organizations auditor has to depend on the internal control system for the conduct of his audit work. The auditors duties relating to the internal control are as follows: (1) (2) (3) (4) (5) Study the system of Internal control: Auditor should understand the system properly and thoroughly. Routines: he has to check procedures followed in the routine accounting of work. Collection of information: he has to collect information about the hierarchy as well as financial powers assigned to various heads. Mechanical devices: he also has to check whether the mechanical devices are used in the routine work. Measures for improvement: He should bring to the notice of the management any shortcomings in the system and can also give the suggestion for improvement.

Limitations of Internal Control: Internal control can give only reasonable assurance that the stated objectives are achieved. Therefore, therefore, there are certain limitations to the internal control system. (1) (2) (3) (4) (5) The most important factor in any system i.e. possibility of human error. Most of the controls do not apply to the unusual transactions. Manipulation and misappropriations by top management itself will complete defeat the purpose of internal control. Control may not be cost effective as compared to benefits. In todays dynamic business world controls may keep very limited scope for changes in conditions.

ADVANTAGES OF INTERNAL AUDIT 1. Proper Accounting System: The benefit of internal audit is that proper accounting system is introduced. Accounting system is a chain of activities in an entity by which transactions are processed for maintaining financial record. There is a need of orderly devices to achieve desirable results. 2. Better Management: The benefit of internal audit is that there is better management of business concern. The auditor can point out the weak areas of management. The goals of business can be achieved if there is proper internal control, internal check and internal audit. It should be noted that management could rely on internal audit for best results. 3. Effective Control: The internal audit is helpful to have effective control over business activities. Control is a management function, which related to supervision and direction of ongoing activities. The manager concerned can remove the difficulties for smooth working internal audit alerts the management for effective control. 4. Division of Work: The internal audit is helpful to apply division of labour. The division of labour is necessary to watch the activities of all employees including management. The auditor can suggest the way and means improve the performance of business. 5. No Error: The internal audit is used to protect accounting records from errors. The accounting and auditing go side by side when accounting work is over there is start of audit. There is not time gap. In such situation the accounting staff is not in a position to commit any error.

Limitations/ Disadvantages Of Internal Audit: 1. Staff Shortage: The limitation of internal audit is staff shortage. There may be need of reasonable audit staff to examine the record. The shortage of staff is a hurdle to get benefit of internal audit. 2. Time lag: The limitation of internal audit starts when true is time lag between recording and checking of entries. The accounting and internal audit must go side by side with minimum time gap. 3. Executive Function: The limitation of internal audit is that the internal audit may be linked with executive function. In this case he cannot examine the accounting books and other records. He cannot find out his own weakness. It will be wastage of time and money to conduct internal audit. 4. Error: The limitation of internal audit is that there may be error in the books of accounts. It depends upon the expertise of internal audit staff. If audit staff is competent there is less chance of error. In case of poor audit staff there is no guarantee that audited accounts are free from errors. 5. Responsibility: The limitation of internal audit is that management may not feel their responsibility in completing the audit formalities. The audit staff may responsibility in completing the audit formalities. The audit staff may give suggestion for proper working of business. The top-level management may not pay attention to suggestions. In this way the audit work cannot help the business.

Internal Check: Definition: (1) Institute of Charted Accountant of England & Wales: Internal Checks are checks on day to day transactions which operate continuously as a part of routine system, whereby work of one person is proved independently or is complementary to the work of another, the object being prevention or early detection of error & frauds. (2) Guidance notes Issued By I.C.A.I: Internal check is the system of responsibility, division of work and methods of recording transactions. In these, the work of an employee is checked continuously by coordinating it with the work of Others.

The Essential and Important Features of Internal Check are as follows:

a) Internal Check is a part of the system of Internal Controls. b) It is the system of allocation of responsibility and division of work among the employees. c) The work is divided in such a way that no employee has exclusive control any over any transactions. d) Division of work is such that work of one employee is crossed checked with the work of other employees. e) Internal check aims to detect and prevent the errors and frauds.

Auditors duty regarding Internal check: The auditor may resort to test check if the system of internal check is full proof. But in the organizations where there are no internal checks and the clerk ha s full control over all the books of accounts, it would be better if the auditor checks all the transactions. AAS-6 makes the following recommendations in this regard: Establishment of Internal check system: Establishment of the system of internal check is responsibility of management and not the auditor. Reliability on the system of internal check: Auditor first have to check whether internal checks are in operation and has evaluate the checks to ascertain how much he can rely on them. Evaluation: the auditor has to evaluate the internal checks to ensure that they can prevent and detect errors and frauds in the book of accounts. It also ensures that all the transactions are recorded in time, are properly authorized etc. For Evaluating the internal checks system, following steps are followed: (a) Understanding the system: (b) Test Application: (c) Judgment:

General Consideration while framing the system of Internal Check:

While framing the system of internal control and internal check following aspects are taken into consideration:

INTERNALCHECK / INTERNALCONTROL

Divisional of Work

Physical Stock

Review of Accounting Policies Meachanical Devices

Automatic Control

Prompt Recording

No access to books

Proper Records

Duties

Change in Duties

Manadatory Leaves

Authority Levels

1. Division of work: The work in a particular department should be divided among different employees. Different persons should deal with different aspects of transactions. 2. Automatic control: The work should be divided in such a way that the work of one person is checked by the work of another. 3. No access of book of accounts: The persons who are in physical custody of any assets like cash should not have access to the books of accounts. 4. Change in duties: the duties off employees must be changed from time to time. This is a must in case of employees handling cash, stock etc.

5. Mandatory Leaves: the employees should be asked to take at least once in a year to enable detection of errors and frauds and mistakes.

6. Proper record keeping: All books, vouchers and other documents should be properly classified and filled so they can be easily made available for future references. 7. Prompt recording: Transactions should be recorded as promptly as possible. 8. Physical stock taking: Periodical stock taking has to be done. This work has to be given to employees of different department who do not have access to book of account. 9. Review of accounting policies and procedures: periodical review of accounting policies and procedures has to be done ensures that there is a consistency in these policies. 10. Mechanical Devices: Mechanical devices should be used wherever possible to reduce the possibility of human error. 11. Clear Definition of duties: Duties of each employee should be clearly defined. 12. Authority levels: There must be clear-cut authority levels for authorization of various transactions.