INTERNAL AUDIT vis-à-vis INTERNAL CONTROL Welcome to the session DAY II INTERNAL AUDIT vis-à-vis INTERNAL CONTROL

Session Overview During last sessions we have discussed the definition of IC, its role and objective. During this session distinction between internal audit and internal control will be subject matter of discussion. This will include its relevance in Government and Commercial accounting system.

Session overview continued Internal control are the whole system of controls established by the management in order to carry out the business of organisation in an orderly and an efficient manner, ensure adherence to management policies, safeguard the assets and secure as for as possible, the completeness and accuracy of records.

Learning objective At the end of the Session participants will be able to understand 1) Difference between internal audit and internal control. 2) Participants will be able to determine how the internal auditor can contribute to improving the effectiveness of internal cointrol

Learning objective Continued They will also understand how the system of internal control reduce the risk of internal and external audit. They will also understand how the internal control should be reviewed from the perspective of substantive dimensions

Broad distinction between Internal Control and Internal Au Ensuring reliability and integrity of information Ensures the compliance with policies, plans, procedures, laws and regulations Ensures safeguarding of assets. Ensures economical and efficient use of resources Ensures accomplishment of established objective and goals for operations and programmes IA examines and evaluates the planning to determines that goals are achieved. Evaluates system, processes, operations, functions and activities IA evaluates the existence of reasonable assurance of achievement of goals, results etc Internal auditing performs evaluations at a specific points in the time but should be alert to actual and potential changes in conditions which affect the ability to provide assurance from forward looking perspective.

Nature and scope of Internal Auditing IA traditionally developed as an audit on behalf of the management to ensure that.. a) The existing internal controls are adequate and effective b) The financial and other records and reports show the results of actual operations accurately and promptly c) Each unit of the organization follows the policies and procedures as laid down by top management

What is an internal auditing It is an independent appraisal function established within an organization to examine and evaluate its activities as a service to management In an internal audit emphasis is given on detection of fraud and accuracy of financial records. Internal auditing is no longer considered as a mere routine review of financial and other record But it is to assist members of organization in the effective discharge of their responsibilities. Internal auditor furnishes the members of the organization with information concerning activities.

Scope of modern internal auditing Internal auditing is an examination and evaluation of the adequacy and effectiveness of organization's system of internal control and the quality of performance in carrying out assigned responsibilities. Internal auditing is concerned with an evaluation of both internal controls as well as the quality of actual performance Internal auditor should review Reliability and integrity of information and the means to identify, measure, classify and report such information.

Purpose of review by Internal Auditor Internal auditing involves an examination to ascertain whether: a) Financial and operating records and reports contain accurate, reliable, timely, complete and useful information b) Controls over record keeping and reporting are adequate and effective.

Compliance with Policies, Plans, Procedures, Laws and regulations See whether all above are complied with regulations regarding custom, excise, Sales tax, Income tax, labour environment, safety, foreign exchange, factory regulations are complied with. Non compliance which may significantly affect the operations should be brought to the notice of the management.

Safeguarding the Assets. Internal Audit should review the means for safeguarding the assets. See that action to safeguard are appropriate, adequate and proper. Verify the existence of assets. Assess the risk of losses from theft, fire, improper activities and exposure to elements of nature.

Economical and Efficient use of resources. IA should appraise the economy and efficiency with which resources are employed. See that operating standards have been established by management see that deviations from operating standards are identified, analyzed and communicated to those responsible for corrective See that corrective actions have been taken.

Standards for effective Internal Audit. IA should have statements of purpose, authority and responsibility It should establish the plan to carry out the audit. Written policies and procedures should be decided to guide the audit staff. Establish a programme for selecting and developing the human resources of the Internal Audit wing

Standards continue.. Internal Audit should co ordinate internal and external audit efforts. Maintain a quality assurance programme to evaluate the internal auditing department. IA wing should have the staff with technical proficiency and educational background.IA should obtained Knowledge, skill needed and Internal Audit should be properly supervised.

Summary Internal audit is conducted periodically after transactions are over. It is conducted as per directives of the management for appraisal of function within an organization. It is concern with an evaluation of both internal control as well as the quality of actual performance.

Nature of Internal Control Similarity between Internal control and Internal Audit is that the respective staff performs the function on behalf of the management. Internal control is exercise in order to prevent the irregularities where as internal audit try to detect the irregularities/omission committed by the persons performing.

Continued.. If the Internal Control is effective, it helps to the internal auditor to select the sample size for conducting audit. If the Internal control is weak, auditor may decide to conduct more extensive scrutiny of transactions. He may decide to place greater reliance on direct confirmation by concern persons.

Continued.. Internal control is essential prerequisite for efficient and effective management. Every management should establish a system of internal control appropriate to the size an nature of business of the entity. The system of internal control extends beyond those matters, which relate directly to the function of the accounting system.

Scope of Internal Control Internal audit relate to examination accounts, it is an independent financial audit Internal control extends beyond that. It is a operational control such as quality control, work standards, budgetary control, periodic reporting, policy appraisal, quantitative controls.

Classification of internal control I.C classified in to two broad categories. (i) Accounting control and (ii) Administrative control

Classification continued Accounting controls comprise the plan of organisation, methods and procedures that are concerned with the safeguarding assets, prevention and detection of fraud and error, accuracy and completeness of records and timely preparation or reliable financial information.

Classification continued.. Administrative control include all other managerial control concerned with the decision process. Administrative control is a system of instituting checks on day to day transactions which operates continuously as a part of routine system whereby the work of one person is complimentary to another.

Objects The object of IC being the prevention and early detection of fraud or error. Procedures are so designed that no single person is authorized to carry out all the stages involved in transaction. No single individual should have an exclusive control over any one transaction or a group of transactions.

Continued... If internal control is perfect, then fraud cannot take place unless there is a collusion between two or more persons Internal control involves prompt and independent verification of an individuals work by prescribing cross checks and cross reconciliation as a part of operation procedure itself.

Difference between scope of Internal Audit & Internal Control The scope of internal audit in an enterprise may be confined to reviewing whether accounting and other records are properly maintained. The scope of Internal control may be wide enough to include a review of whether the resourse utilisation in the enterprise is efficient and effective.

Continued.. Internal Audit is essentially a post transaction review to evaluate the records, controls, and operations in an organisation. Internal Control is the whole system of control while internal check and internal audit are two of its constituents.

Inherent Limitations on Internal Control Controls have to be cost effective. Thus some controls may not be instituted merely because they are not cost effective. Most controls are directed at transactions of a usual nature. Therefore transactions of an unusual nature might escape being subjected to rigorous controls.

Continued.. The potential of human error remains in any system control. Any system of control has its limitations in preventing frauds through collusion between two or more persons. Member of the management may himself override the controls

Continued.. Control may not keep pace with changes in conditions Management itself may manipulate transactions or estimate.

Structure of Internal Audit and Internal control Internal audit is conducted by the team of auditor as per objective and area decided by the management. Internal control looks on the day to day basis the proper authorization, prompt recording of transactions and accountability for and safeguarding of assets.

Categories of Internal Control Segregation and rotation of duties Authorization of transactions Maintenance of Adequate records and documents. Accounting for and safeguarding of assets Independent checks.

Evaluation of Internal control by Auditor. It is necessary to ascertain whether control were in use throughout the period under audit. The auditor can acquire an understanding of internal control system through discussions with personnel at various organizational levels and by reference to documents such as organisation charts, procedure manuals, job descriptions and flow charts.

Continued. It can be evaluated in the following stages (1) Testing compliance (2) Evaluating the system (3) Communication of weaknesses in Internal control system.

Techniques for evaluation of internal control Flow charts Internal control questionnaires Formulating internal control scheme. Internal control is not one event or circumstance, but a series of actions that permeate an entity’s activities. These actions occur throughout an entity’s operations on an ongoing basis.

Substance Management is an important element both for Internal audit and Internal control

Thank You