Module 2

MODULE 2
INTERNAL CONTROL
MEANING
• A broad term with wide coverage.

• It covers the control of the whole management system.
• The control may be financial or non-financial.
• Internal control system involves a number of checks and controls

exercised in a business to ensure its efficient and economic working.
PURPOSE
From client’s point of From the Auditor’s point

view of view
Providing reliable data
To determine whether an audit is possible, If
possible, then
Safeguarding assets and records
To promote operational efficiency

To determine the scope of audit
To encourage adherence to prescribed
policies
ELEMENTS/ CHARACTERISTICS/PRINCIPLES OF
INTERNAL CONTROL - CROSSASIA
• Competent and trust worthy personnel

• Records, financial
• Organizational plans
• Segregation of duties
• Supervision
• Authorization- written
• sound practices
• Internal audit
• Arithmetic and accounting controls
INTERNAL CHECK
Internal check means that check imposed in such a way on a day to day
transaction that work of one person is checked by another person
automatically in this way the chances of frauds and errors minimizes. Because
the errors or mistake made by one person is detected by another.
POSITION & RESPONSIBILITY OF AN AUDITOR
DURING INTERNAL CHECK
• Examination
• In Case Of Satisfactory System
• Unsatisfactory Case
• Some Sections Are Inadequate
• Suggestions
CHARACTERISTICS/PRINCIPLES OF A GOOD
SYSTEM OF INTERNAL CHECK
• Responsibility
• Completion
• Rotation of employees
• Automatic check
• Reliance
• Safeguards
• Supervision
• Formal sanction
• Periodical review
INTERNAL CHECK - SALES
The sales and collections cycle in a business refers to the set of processes that
begin when a customer purchases goods or services and ends when the
company receives complete payment for the purchase.
The Procedures are:
• Test of Controls
• Transactional Testing
• Fraud
• Internal Auditing
CASH SALES- SALES AT THE COUNTER
• Salesman
• Cashier
• Gatekeeper
• Customer
INTERNAL CHECK WITH REGARDS TO PURCHASES
Requisition: The procedure for issuing purchase requisition should be specified.
Enquiry: Purchases department makes an enquiry about the terms and

conditions of purchases from different suppliers.
Purchase order: The purchase department places orders which should be

recorded in the purchases order book.
CONT...
Receipt of goods: Concerned department should be informed about the receipt
of the goods.
Making the payments: The purchase department should thoroughly check the
invoices and send the same to accounting department for payment.
A good system of internal check with regard to purchase will prevent fictitious
purchase , double payment etc.,
INTERNAL CHECK – RECEIPTS AND PAYMENTS
Cash Payments | Cash Receipts (Credit Sale) | Cash Receipts (Cash Sale)
1. Preparing 1. Recording 1. Making Sale

cheques receipts 2. Recording
2. Stamping bills 2. Daily receipt of cash
payable depositing 3. Daily
3. Signing 3. Maintaining depositing (at
Cheques receipt book bank)
4. Obtaining
receipts
5. Preparing BRS
INTERNAL CHECK - DEBTORS
Purpose : prompt payment from customer;
segregation of duties to avoid fraud, error or loss
Receive purchase order Create Sales Order
Post sales journal Prepare sales invoice
Post Accounts Receivable Ledger

INTERNAL CHECK WITH REGARDS TO FIXED
ASSETS
• Are those of a permanent nature by means of which the business is carried

on.
• Purpose of earning income and not for the purpose of sale.
• Expenditure on fixed assets is termed as Capital expenditure.
• Purchase of Fixed assets may be for the expansion of the project or normal
additions.
In many companies the following elements of Internal Control over Fixed
Assets are considered and performed according to standard guidelines:
• Approval process for Capital Expenditures

• Determining whether planned expenditure is capitalized.
• Purchasing and Accounts Payable systems are correctly applied
• If capitalized, appropriate useful life and salvage value determined
• Correct depreciation expense is calculated and applied each period
• Property tax reports filed with tax jurisdictions
• Insurance coverage relates directly to asset exposure
INTERNAL CHECK- INVESTMENTS
• Responsible for authorizing purchase and sale.

• Arrangements for maintaining investment register.
• Documents in safe custody
• Broker’s note
• Any Bonuses, rights, capital repayments, dividends or interests received.
• Investments to be in the name of the company.
INTERNAL AUDIT
• Internal audit is a review of various operations and records of the company by staff
specially appointed for auditing purpose. It is a specialized service requiring not only
expertise in accounting but also in organizational behavior and in functional areas of
management.
• 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”.
ADVANTAGES OF INTERNAL AUDIT
• Transparency in maintaining books of accounts and accountability.
• Internal audit checks the books of accounts, detects errors and frauds and helps in its
correction which makes the act of final auditor easier.
• Helps in decision making
• Internal audit increases the morale of honest staff because evaluation of performance
of any staffs will be made at any time.
• Internal audit detects the misuse of resources in time which helps to reduce
unnecessary expenses.
DISADVANTAGES OF INTERNAL AUDIT
• It may cause a company's auditors to become over-dependent on the internal

control system, which may lead them to relax other measures of checking for
fraud and errors.
• Detection of frauds and errors may not be fully possible.
DIFFERENCE BETWEEN INTERNAL AUDIT
AND EXTERNAL AUDIT
INTERNAL AUDIT EXTERNAL AUDIT
• Conducted to detect and prevent errors and frauds. • Carried out to check the accuracy.
• Internal auditor is appointed by management. • Appointed either by shareholders or govt.
• Professional qualification is not necessary. • External auditor must have professional qualification.
• Carried out throughout the year. • Conducted periodically after preparation of final
accounts.
• Fixed by management.
• Fixed by shareholder.
• Submit reports to management.
• Submit reports to shareholders.

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• A broad term with wide coverage.

• Internal control system involves a number of checks and controls

From client’s point of From the Auditor’s point

To promote operational efficiency

• Competent and trust worthy personnel

Requisition: The procedure for issuing purchase requisition should be specified.

Enquiry: Purchases department makes an enquiry about the terms and

Purchase order: The purchase department places orders which should be

1. Preparing 1. Recording 1. Making Sale

Receive purchase order Create Sales Order

Post sales journal Prepare sales invoice

Post Accounts Receivable Ledger

• Are those of a permanent nature by means of which the business is carried

• Approval process for Capital Expenditures

• Responsible for authorizing purchase and sale.

• According to Watter B. Meigs, “internal auditing consists of continuous , critical

• It may cause a company's auditors to become over-dependent on the internal

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