Internal Control

Concept Business – Complex Process Survival in competition – Controlling the business by putting different factors in limits Need to establish controls Controls – a) Operations b) Human Behaviour

Definition Systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to- (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plan

Administrative Controls Types of Internal Controls Authority in recording transactions Prompt Recording , correct amount Assets – Access, use, disposition Accounting Controls Controlling human resources Administrative Controls

Duties of Auditor Study the system Routines Collection of Information Mechanical devices Measures for Improvement

Study and Evaluation Reasons Test Checking Acquaintance with client’s business Determining the extent of test check Determining the effectiveness of system & giving suggestions.

Stages in study & Evaluation Study the system Testing Compliance Evaluating the system Communication of Weakness

SAMPLE TRANSACTIONS Sales / Purchases / Salaries & Wages– Division of Work (Sales/Stores/Accounts) Procedures(Dispatch Order> Bill)(Receipt, Q & Q) Cross Checking Change in duties Annual Leave No access to books of Accounts Proper Recording Prompt Recording Accounting Policies Safeguarding Errors & Frauds

S.T. 2 Debtors / Creditors- Credit Limits (only Drs) Prompt Recording Prompt Adjustment Age-wise Division Statements of Accounts(Stt>Debtors>Balance confirmation>Differences>Reconciliation) Discounts & Write offs/ Rebates Reconciliation

S.T. 3 Salaries & Wages Keeping track of new employees, Attendance, Pay slips Signatures on pay sheet, Absent employees, Cheque (A/c Payee), Direct deposit(A/c No. , Amt) Prompt Recording – Pay sheets preparation on time, up to date CB &PB Safeguarding – Safe custody of cheques

Internal Checks An accounting procedure whereby routine entries for transactions are handled by more than one employee in such a manner that the work of one employee is automatically checked against the work of another for detection of errors and irregularities

Features - Part of internal Control Allocation & Division of Work Cross checking No exclusive control Detect errors & frauds

Auditors’ Duty Establishment Reliability Evaluation (understand, test check, judgement)

General Considerations Division of Work Automatic Control No access to books of accounts Change in duties Mandatory Leaves Proper record keeping Prompt Recording Physical Stock Taking Review of Accounting Policies Mechanical devices Clear definition of duties Authority Levels