T.Y.B.

COM –SEM -5
ADVANCED ACCOUNTING &
AUDITING - 5
DR. HIRAL DESAI
PH.D., MBA (FINANCE), M.COM.
 •UNIT – 3
•INTERNAL CONTROL
•INTRODUCTION
•OVERVIEW
•INTERNAL CHECK SYSTEM(IN DETAILS)
•CHAPTER 5:
 Internal
control

Internal Internal
Check Audit
INTERNAL CONTROL
• It is a system of controls set up by the company and includes
financial as well as other controls that makes it easy for business
to run smooth.
• Its scope goes beyond accounting and also includes
administrative control, budgetary control , quality control etc.
• “Internal Control is the whole system of controls, financial and
otherwise of the company in order to carry on the business of
the company in an orderly manner, safeguard its assets and
secure as far as possible the accuracy and reliability of its
records.” -The council of the Institute of Chartered Accountants
of England and Wales.
• Scope of Internal Control:
• The scope of internal control extends beyond the accounting control and it includes
operational control like budgetary control, quality control, quantity control, periodic
operating reports, internal check and internal audit.
• So internal control divide in two parts: Accounting controls and Administrative control
• Accounting control- the plan of organization and all methods and procedures that are
concerned mainly with, and relate directly to, safeguarding of assets and the reliability of
financial records. Eg. Authorisation and approval of transactions, separation of duties with
regards to record keeping and accounting reports, custody of assets, physical control of
assets etc.
• Administrative controls – the plan of organization and all methods and procedures that
are concerned mainly with operational efficiency and adherence to managerial policies,
and usually relate only indirectly to financial records. Eg. Statistical analysis, performance
report, employee training programmne, etc.
• Objectives of Internal Control:
• 1.transactions are executed as authorized by management
• 2.the financial records are in conformity with generally accepted accounting principles
• 3.the assets are properly maintained
Internal check- Based on the principle of division of labour where work
of one employee is checked independently by another employee.
• Objects of internal check • Characteristics of internal check
• Detect errors • Employees work is defined and divided
• Detect frauds • All work is constantly cross checked
• Fix employee responsibility • No duplication of work
• Discipline employees • Single handed control over any dept not
• Keep moral check on all possible
• Improve efficiency of employees by • Keeping a Continuous check over cash
reduction of errors and accounts specially possible
• Check that no transaction is left out from • Chances of errors and frauds are reduced
being recorded • Sort of continuous internal audit happens
• Arrange for compilation of accounts
quickly
• Preparation of final accounts speeded up
Advantages of internal check
• 1. To employer
• Employees understand their rights, duties and responsibilities
• Chances of errors and frauds reduce
• Work is done efficiently
• Possible to keep a moral check on employees
• Owner is assured about the correctness of accounts
• Final accounts can be prepared promptly
• 2. To auditor
• Auditors work load is reduced and he can go for test checking
Limitations of internal Check
• Auditor might tend to be careless if he knows there exists the internal
control system
• Expensive to small businessman since it requires more manpower
• Chances of intelligent frauds never reduces.
• Internal check system is not all together defective. It does not abolish
frauds and malpractices altogether but it certainly does reduce their
chances. Hence it is rightly said that internal check is both a pitfall as
well as a safeguard.
Characteristics of a good internal check system
• Division of work- consider capabilities of workers and then distribute the duties
and responsibilities
• Dependence- no single individual should be allowed to handle all aspects of a
single transaction
• Deposit cash in bank- daily cash balance should be deposited in bank at the end
of a working day
• Change of duties- periodic internal movement of employees should be
undertaken to assign different duties
• Compulsory leave- workers should be encouraged to go on leave and if they
don’t, send them on mandatory leaves so as to investigate his work
• Security deposit- employees involved with handling cash transactions should be
asked to keep a lumpsum amount with company as a security deposit
• Self balancing ledgers- these should be introduced so that no single employee
will have complete knowledge of the business to defraud it
• Planning the procedure- immediately along with work division, the
procedure to conduct the work should also be simultaneously laid down
to reduce delay
• Information with regards to policy matter- employees should be well
equipped with all the policy matter related information so as to work in
adherence to the same
• Flexibility- keep up possibilities to bring in changes mid way whenever
needed
• Mechanized accounting- use of computers and soft wares should be
encouraged in order to reduce chances of error or omission
• Use of reports- submission of work reports should be mandatory after
completion of tasks so as to enable the management to evaluate
employee performance
Differences
Internal check Internal audit

• Arrangement of work so that its • Review of records

checked by others • Main object is assurance of
• Main object is prevention and adherence to accounting policies
detection of frauds and errors so as to smoothen annual audit
• Includes allocation of work and • Scope is wide enough depending
fixing responsibilities majorly upon entities to be audited
• Checking is carried out • Performed after accounts are
simultaneously with the books of written
accounts • Requires special staff with
• No additional staff is required knowledge of accounts, law and
audit
Differences
Internal audit Statutory audit

• Carried out by employees • Carried out by audit firm not related to

• Voluntary business
• Nature and scope fixed by management • Mandatory
• Internal auditor and his staff are • Nature and scope of audit fixed by
appointed by the management regulatory authority
• Duties and Remuneration are fixed by • Statutory auditor is appointed by
management shareholders
• Not necessarily a CA • Duties.rights and liabilities are laid down
by the Companies Act,2013 and
Remuneration is fixed by shareholders.
• Compulsory CA
Differences
Internal audit Statutory audit

• Internal auditor is an employee of the • Statutory auditor is an independent

company person and he is an agent of the
• Can be removed anytime by shareholder for the purpose of audit.
management • Can be removed by shareholders only
• Not entitled to attend shareholders in AGM
meeting • Mandatory to attend and present his
• Continuous audit report
• Liable to management • Annual audit
• To present his report to the • Liable to shareholders
management. • To submit his report to the
shareholders.
Internal check for cash sales
Sales at Counter Sales by Travelling Salesman Sales by Post

• In addition to salesman there must • When cash collected by salesman, he • Records for the sales by post should
be a cashier in each department should give a kaccha/interim receipt be separately maintained
• Prepare 4 copies of cash memo in 4 • Head office on receiving cash should • Detailed of client, his order, payment,
colours and serially numbered verify and send pukka/final receipt address should be maintained in
• Salesman- 1 copy, delivery clerk- 2 nd • Customers should inform in case of separate registers/books
copy, remaining 2 copies- customer non receipt of final bill • Returns should also be verified and
• Customer give 2 copies to cashier, • Traveling agents should send their recorded
• cashier will stamp cash received, expense sheet separately and not • Responsible officer should be
keep 1 copy with him and return 1 to deduct it from client’s cash received allocated the duty to verify sales
customer • No salesman should be permanently • sales register Summary of goods
• Customer show his copy to delivery given one place to tour and sell sent and cash received must be
clerk who will verify with his copy, goods tallied
stamp delivered
• End of day salesman, delivery clerk
and cashier cross verify their copies
• Cash collected should be daily
deposited in bank
• Change employee duties regularly
Internal check for wage payments
Attendance Record Wages Calculation Wage Payment

• Scientific system of recording • Prepare wage sheet with worker • Workers should produce their ID
attendance- arrival and departure name, his wage rate, his time cards while collecting wages
time must be accurately recorded worked/units produces, consider • Workers while accepting wages
• Payment on time basis- use leaves, allowances and then calculate should put their initials or thumb
automatic time recording clocks, the net wages to be paid to them impressions
biometric systems. • Cashier paying wages should • If payment for workers remains o/s,
• Or give a token to each worker, he withdraw cash from bank daily it should be deposited in separate
shall hang in on a board once he account
comes, remove the board/ lock it
after time and those tokens not • Casual labour- their number keeps
hanging shall be considered fluctuating.
late/absent
• So their presence should be verified
• Piece wage payment system- wages and certified by a supervisor
paid on basis of number of units
produced.
• Record maintained should be
countersigned by foreman or
supervisor
• Cash Payments
• Consider the following points while doing Internal Check for cash payments −
• Excluding petty cash payments, all payments should be made through cheques, Demand Drafts,
RTGS (Real Time Gross Settlement), NEFT (National Electronic Fund Transfer) or any other banking
mode as available time to time.
• Persons responsible for preparing cheques should be clearly specified. Before passing a bill or an
invoice for payment, it should be ensured that the enterprise has secured the goods or services.
• Person making payments should have no connection with the receipt of cash.
• Every paid bill or voucher should be stamped as “Paid” to avoid double payments for same bill or
voucher.
• Unused cheque books should be under the custody of a responsible person.
• Only persons duly authorized to sign the cheque
• Bank reconciliation statements should be prepared at regular intervals.
• Confirmation of balances from creditors should be made directly.
• Cash receipt should be obtained for each payment.
• For petty cash payments petty cashier will be responsible instead of main cashier.
• Petty Cash should be maintained on Imprest system.
• In absence of cash receipt, proper bill or voucher should be obtained from the petty
cashier.
• Petty cash book should be checked by the Cashier frequently.
• Bank reconciliation should be done on a regular interval.
• Pay-in slip to deposit cash in bank should be filled by the Cashier not by the person
who is going to deposit the cash.
• As per the provision given under section 40A(3) of the Income Tax Act, 1961 for
payment exceeding Rs. 20,000/- it is stated that “Where the assessee incurs any
expenditure and it is paid in a sum exceeding Rs. 20,000/- otherwise than by crossed
cheque or crossed bank draft, whole of such expenditure is disallowed”
• Cash Receipts
• A Cashier deals with the following tasks concerning cash receipts −
• Record cash receipts immediately upon the receipt of cash.
• He is not authorized to keep cash with him.
• He is not allowed to make any expenditure out of it.
• Cash receipt should be deposited in to bank on daily basis.
• Cashier should not be allowed to do primary entry in the books.
• Purchases
• Requisition slips duly signed by the head of the department should be issued and sent to the purchase
department, clearly mentioning the quantity, quality and the delivery date on the requisition slip
• Enquiry about the required material should be done by the purchase department from different suppliers of the
material
• Purchase order should be issued on the basis of the lowest quotation received from the suppliers. There may be
four copies of the purchase order, one for the supplier, second for the stores department, third for the accounts
department and the fourth copy should be retained by the purchase department
• Goods should be sent to store after proper examination at the time of receipt of goods. Store department will
inform concerned department for the same.
• After proper verification of purchase invoice same should be sent to accounts department for their accounting
and payment purpose
• On the basis of the purchase order, the accounts department will book that invoice in our books of accounts and
if there is any discrepancy, debit note should be issued to the supplier under intimation to the purchase department.
• Payment is made to the supplier according to the due date.
• Sales
• After receipt of the sales order, one copy of it should be sent to the dispatch
department for further process.
• The dispatch department after receipt of the sales order packs the material
according to the order.
• Preparation & verification of Invoice is done based on the sales order.
• Entry is done in goods outward register before sending it to customers.
• Sales return is entered in goods inward register and a credit note for the same is
issued to customers accordingly.
• Stores
• A Store is a very important and crucial department of any industry and proper control over store is
very much essential to prevent theft, pilferage and misuse of inventory. Following points need to be
considered for Internal Check on Stores −
• Every store must be equipped with all the facilities as require keeping inventory in order and
convenient location of store is also important for any industry.
• Triplicate copy of G.R.N. (Goods Receipt Note) should be issued on receipt of material, one to be
sent to purchase department along with invoices, second for accounts department and third will be
retained by store department.
• Receipt goods should be stored at proper place. Proper stock accounting should be there for
receipt of goods and on issue of goods.
• Physical stock taking at regular interval should be carried out and reconciliation of stock with
books should be done without any fail. There should be a proper and quick action in case of any
discrepancy.
• If material is issued to any other department, it needs to be specified on “Material Transfer Note”,
the return of Material should be on the MRN (Material Return Note) and the material being issued
to the customer should be on the basis of Sales Invoice only.
• Fixed Assets
• Purchase of Fixed Assets may be for normal addition to Fixed Assets, for new project
or for expansion of business. Fixed assets are of permanent nature to earn income, i.e.,
Land, Building, Plant & Machinery, Furniture & Fixtures, computer and vehicles, etc.
• Following are the important checks related to fixed assets −
• Sanction of capital expenditure should be done by a committee may be set up for this
purpose or by the proper authority. Same procedure should be followed in case of
transfer or discarding of any assets.
• Distinction between Capital and Revenue expenditure is must for proper accounting
records.
• Fixed Assets register should be maintained giving all the description about qty, cost
and location etc of fixed assets.
• Physical verification of fixed assets should be there from time to time.
• Accounting and depreciation of fixed assets should be done according to Accounting
Standard-10 issued by the Institute of Chartered Accountants of India.
• Investments
• Following points need to be considered while dealing with investments −
• Sale and purchase of investment should be done by an authorized person only.
• Detailed investment register should be prepared and physical verification of the
document of title on periodically basis to be done. These documents of title should
be kept in safe custody of company.
• Correctness of charges of brokers should be checked.
• Checking of accounting entries on account of dividends, interest, bonus and capital
repayment should be done.
• Physical verification of investment should be done.