INTERNAL CONTROL

PPA UNIT 3

AU ASOB BCOM SEM VI LN 2/24/2019 1

INTERNAL CONTROL

• In every well organized concern there exist a large number of ways and
means where a check is imposed on the accuracy of the executive work. These
ways and means are called the system of ‘internal control’.
• Internal control refers to the whole system of control employed by the
management in the conduct of the business. It includes internal check, internal
audit and other devices of control. Its efficient working in practical terms is
helpful not only for the management but also for the external auditors.

AU ASOB BCOM SEM VI LN 2/24/2019 2

DEFINITION OF INTERNAL CONTROL

• According to Howard F. Stettler, “Internal control in a broader term, is

generally used to encompass both internal check and internal audit”.
• According to Spicer and Pegler, “Internal control is best regarded as
indicating the whole system of controls, financial and otherwise, estimated by
the management in the conduct of a business including internal check, internal
audit and other form of control.

AU ASOB BCOM SEM VI LN 2/24/2019 3

DIFFERENT TYPES OF INTERNAL CONTROL

• FINANCIAL CONTROL
Financial controls regulate the income and expenditure of the business. They
have a check on the financial operations of the company. They take the shape
of budgetary controls and other techniques such as PERT (Programme Evaluation
and Review Technique), Periodical reconciliation of cash book and bank pass
book of business et

AU ASOB BCOM SEM VI LN 2/24/2019 4

TYPES OF INTERNAL CONTROL

• NON FINANCIAL CONTROL

• Non financial controls are employed to prevent errors and frauds. Some of them are as
follows.
• Installation of time recording clocks to record the arrival and departure time of workers in the organization.
• Use of franking machines for affixing postage stamps.
• Introduction of mechanical devices for the preparation of wage sheets and totaling of the accounts and
analyzing the transactions.
• Adoption of perpetual inventory system in stock and other inventories.
• Physical verification of stock at regular intervals.
• Obtaining confirmation of balance from customers at periodical intervals.
• Physical verification of assets at periods.

AU ASOB BCOM SEM VI LN 2/24/2019 5

INTERNAL AUDIT & INTERNAL CHECK

• INTERNAL AUDIT
• Internal audit in its broadest sense is, “the regular and independent appraisal by a staff of internal
auditor of the accounting, financial and other operations of a business”. It is now coming to be called the
operational (or) management audit.
• INTERNAL CHECK
• Internal check is a system where the work of one is automatically verified by the other in the course of
recoding of the business transactions.
• All the above internal controls are the tools and techniques used by the managers of the business to
regulate the flow of finances, ensure arithmetic accuracy in accounts, avoid irregularities in the operation of
accounts and make sure that all transactions are correctly and completely recorded in the books of accounts.

AU ASOB BCOM SEM VI LN 2/24/2019 6

OBJECTIVES OF INTERNAL CONTROL

• That all transactions are carried out with specific sanction and authorization of the management.
• That the transactions are accounted in the related books of accounts, regularly, correctly and
systematically according to the accounting policies and procedures.
• That there is complete accountability for all assets.
• That use and access towards assets are made only with proper authorization.
• That there is periodical verification and comparison of assets in existence with accounting records
and appropriate action is taken with regard to any difference.
• That adequate accounting system appropriate to size and nature of business is in existence.
•
AU ASOB BCOM SEM VI LN 2/24/2019 7
PRINCIPLES OF INTERNAL CONTROL

• Competent and trustworthy personnel

• 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 Organizational plans
• Documents perform the function of transmitting information throughout the client’s
organization and between different organizations. The document must be adequate to
provide reasonable assurance that all assets are properly controlled and all transactions
correctly recorded.
AU ASOB BCOM SEM VI LN 2/24/2019 8
PRINCIPLES OF INTERNAL CONTROL

• Segregation of Duties
• For the prevention of both intentional and unintentional errors, following
types of segregation of duties should be taken case of
• Separation of operational responsibility from record – keeping responsibility.
• Separation of the custody of assets from accounting.

AU ASOB BCOM SEM VI LN 2/24/2019 9

PRINCIPLES OF INTERNAL CONTROL

• Supervision
• Directors should review the company’s financial operations and position
at regular and frequent intervals comparison with results for previous periods
indicates discrepancies that call for further examination.
• Authorization written
• If control, is to be satisfactory, every transaction must be properly
authorized. Authorization can be of two types – General and Specific.

AU ASOB BCOM SEM VI LN 2/24/2019 10

PRINCIPLES OF INTERNAL CONTROL

• Sound Practices
• Sound practices of administration require that established procedures, policies and delegation of responsibility
should all be in black & white. This helps in avoiding questions, attempts to shift responsibility for unsatisfactory performance
etc.
• Internal audit
• It is the examination of accounts of a business concern by its employees specially appointed for the purpose. It is an
independent appraisal of activity within an organization for the review of accounting, financial and other business practices.
• Arithmetic and Accounting Controls
• Chart of accounts i.e balance sheet and income statement is an important control because it provides the frame
work for determining the information presented to management and other financial statement users.

AU ASOB BCOM SEM VI LN 2/24/2019 11

PRINCIPLES OF INTERNAL CONTROL

• Arithmetic and Accounting Controls

• Chart of accounts i.e balance sheet and income statement is an
important control because it provides the frame work for determining the
information presented to management and other financial statement users.

AU ASOB BCOM SEM VI LN 2/24/2019 12

ADVANTAGES OF INTERNAL CONTROL

• To avoid waste, in efficiency and fraud and to keep intact its resources.
• To attain highest type of accuracy and reliability in the maintaining of the accounts
and operating data.
• To encourage and measure how fair the policy of the business is being implemented.
• To evaluate the efficiency of performance in all aspects of business activities; and
• To provide aid in management planning

AU ASOB BCOM SEM VI LN 2/24/2019 13

LIMITATIONS OF INTERNAL CONTROL

• A control must be cost effective. The cost of the control procedure cannot be
disproportionate to the potential loss due to fraud (or) error.
• Transactions of unusual nature may not fall within the purview of internal
control.
• The effectiveness of the system is always affected due to carelessness,
distraction and misunderstanding of instructions.

AU ASOB BCOM SEM VI LN 2/24/2019 14

LIMITATIONS OF INTERNAL CONTROL

• The employee in collusion with others in the business unit or with third parties may
find out circumvention of controls.
• The effectiveness of controls of largely depends on the persons who implement them.
If the persons responsible for exercising controls abuse the responsibility, the control
system may not have any impact on the normal working of the business.
• The changing circumstances in business environment may cause inadequacy in
procedural conduct of business and thereby compliance with procedures may become
difficult or deteriorate.

AU ASOB BCOM SEM VI LN 2/24/2019 15

SCOPE OF INTERNAL CONTROL

• General financial control:

• It is concerned with an efficient system of accounting, adequate supervision,
recording and duplicating systems etc.
• Cash Control:
• It includes proper control for receipts, payments and balances held.
• Control Over Trading transactions:
• This area deals with an efficient system of control over both purchases and sales
transactions.

AU ASOB BCOM SEM VI LN 2/24/2019 16

SCOPE OF INTERNAL CONTROL

• Control Over employees remuneration:

• This area concerns itself with the preparation and maintenance of records for remuneration to employees,
methods of payment etc.
• Capital expenditure control:
• The expenditure on capital assets must be kept under proper control.
• Others: These include
• Maintenance of staff relationships.
• Stock maintenance.
• Control over investments.

AU ASOB BCOM SEM VI LN 2/24/2019 17

METHODS (OR) TECHNIQUES OF INTERNAL
CONTROL SYSTEM.
• Narrative Record.
• It contains a complete written description of the internal control system of the enterprise as actually
found in operation by the auditor. The method of keeping a narrative record may be usefully employed in a
small business where the internal control system may generally be weak. The type and extent of narrative
record will vary according to the requirements and individual judgement of each auditor.
• Questionnaire.
• Internal control Questionnaire is an important and effective method for appraising the internal control
system. The questionnaire contains a set of questions the answers to which provide a valuable insight into the
functioning of the internal control system within the enterprise. The auditor may prepare a standard
questionnaire to be used with suitable modifications in the case of all audit engagements or he may prepare
a fresh one for each audit engagement.

AU ASOB BCOM SEM VI LN 2/24/2019 18

METHODS (OR) TECHNIQUES OF INTERNAL CONTROL
SYSTEM.

• A flow chart is a graphic presentation of any system. It uses symbols to

indicate the relationships between different parts of the system and
operations of each part and the system as a whole. A flow chart for the
purpose of study and evaluation of the internal control system helps to depict
the flow of business transactions of different types, the documents raised in
the process and how these are treated. A flow chart is an visual medium for
proper study and evaluation of the internal control.

AU ASOB BCOM SEM VI LN 2/24/2019 19

INTERNAL CHECK VS INTERNAL AUDIT
INTERNAL CHECK INTERNAL AUDIT
The object is to prevent errors and frauds The object is to detect errors and frauds
The work of recording and checking of entries is carried on simultaneously In case of internal audit, only checking of the recorded entries is made.
with the help of judicious allocation of duties amongst the members of staff

Internal check is done in operation during the course of transaction. Internal audit starts after the records have already been made in books
of accounts

The scope of internal check is very limited. The scope of the internal audit is comparatively broad.

In case of internal check, no new appointment is made for this purpose. In case of internal audit, the work is carried on by the staff specially
Every member of the staff is involved in it. assigned for this purpose.

In case of internal check error (or) fraud if any, is discovered during the In case of internal audit, error or fraud if any is discovered after the
course of work. completion of work.

AU ASOB BCOM SEM VI LN 2/24/2019 20

PROVISIONS OF COMPANIES ACT ON AUDITING

• The Ministry has taken a big step by notifying 183 major sections of Companies Act, 2013
w.e.f. 01.04.2014 out of which the provisions relating to Audit & Auditors is of utmost
importance for all the Chartered professionals out there. This article contains the key
amendments bought into effect in relation to audit and auditors and the way forward.
• Chapter X –Audit & auditors ranging from Sections 139 to 148 of the Companies Act, 2013
(the ‘Act’) alongwith Companies (Audit and Auditors) Rules, 2014 (the ‘Rules’) have been
notified & they shall come into force on the 1st day of April, 2014.
• Below is the summary of all the sections within the ambit of this Chapter alongwith the
corresponding section form Companies Act, 1956:

AU ASOB BCOM SEM VI LN 2/24/2019 21

SUMMARY OF PROVISIONS
Companies Act, 2013 Section Title

139 Appointment of Auditors

140 Removal, Resignation of auditor and giving of special notice.

141 Eligibility, qualifications and disqualifications of auditors.

142 Remuneration of auditors.

143 Powers and duties of auditors and auditing standards.

144 Auditor not to render certain services.

145 Auditors to sign audit reports, etc. (similar)

146 Auditors to attend general meeting.(similar)

147 Punishment for contravention.

148 Central Government to specify audit of items of cost in respect of certain companies. (Cost Audit)

AU ASOB BCOM SEM VI LN 2/24/2019 22