1. 1 Aswathy V S Sr.DAG, O/o AG Lucknow

2. Internal control is the overall control environment established by management of an enterprise FFor effective & efficient monitoring/control of its operations tto provide reasonable assurance of meeting organization's objectives. 2

3. MMaximisation of net worth CCompliance with laws & regulations SSafeguarding assets OOptimising use of resources FFinancial & operational effectiveness PPrevention & detection of errors & frauds RReliability of financial reporting. *** 3

4.  Appropriate division of functional responsibilities  Proper authorisation  Record of business transactions by persons competent to discharge their assigned duties  It incorporates both the accounting and administrative controlsaccounting and administrative controls  Internal check & internal audit are its vital components Internal check & internal audit 4

5.  Methods n procedures related to safeguarding of assets n reliability of financial records  System of authorization & approval of transactions  Separation of duties regarding Record-keeping & accounting reports custody of assets etc  Internal audit  O&M concerned with operational efficiency  Adherence to managerial policies  Statistical analysis  Performance reports  Employee training programs 5

6.  Such an arrangement of duties among staff that the work performed by one individual is independently checked by another in the routine course, so that errors & frauds are prevented, or discovered without delay.  No one person is allowed to handle the transaction from beginning to the end. But its done by concernded sections itself.  Aims at minimising error n fraud  It’s a line function  Continuous & systematic process of examining & reporting on the administrative systems and accounting methods.  Confirms that the management policies are properly executed and are adequate  its an appraisal done by separate section.  Aims at discovering errors & frauds  It is a staff function. 6

7. According to SAP-6 of ICAI, objectives are to ensure that  transactions are executed in accordance with managements general or specific authorisation  all transactions are promptly recorded, correctly so as to facilitate the preparation of final accounts  assets are safeguarded from unauthorised access, use or disposition.  The recorded assets are compared with the existing assets at reasonable intervals and appropriate action taken in case of difference. 7

8.  Segregation of incompatible duties  Physical security of assets and records  IT security  Authorisation & approval controls  Arithmatical & accounting controls  Personnel (like rotation of duties)  Supervision (e.g., optimum span of control) 8

9.  the work of the external auditor starts from assessing the internal control mechanism of the organisation under audit.  Understanding, assessing & evaluating the system, identifying the strong and weak points  Determine the degree of reliance of the internal control and accordingly plan the nature timing & extent of audit.  If internal control is effective auditor can resort to selective verification  Where-ever internal control is weak, detailed verification needed 9

10. MManagement philosophy & operating style MMgt’s commitment to internal controls including internal audit WWork culture & discipline IIntegrity, ethics & competence of entity’s personnel NNature of interaction between entity & its environment 10

11.  Policy files  Act & Rules  Departmental & Office manuals  Office orders  Best practice guides & books  User & system requirement specifications 11

12.  Identify organisational objectives  Study control system vis-à-vis objectives  Determination of established control mechanism.  Compliance and substantive audit tests.  Evaluation  Communication of the weaknesses of the internal control system to management  Prioritise criticality of sub-systems vis-à-vis organisational objectives.  Detailed audit and its report. 12

13.  Management override/complacency  Environmental pressures  Cost factor  Collusion  Human mistakes  Judgment errors Hence, internal controls offer reasonable assurance, not absolute assurance. 13

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