Detailed about Internal control, internal check and internal audit.

1. AUDITING
B. Com II, 2nd Semester
Institute of Commerce
University of Sindh, Jamshoro
Chapter 05
Internal Control, Internal Check and
Internal Audit

2. Internal Control
Internal control refers to the various methods and
procedures adopted for the control of production,
distribution and the whole system (financial and non-
financial) of the enterprise.
In other words,
Internal control means all measures used by business to
guard against errors, waste, and fraud and to assure the
reliability of accounting data.

3. Features of Internal Control
1) It is the overall control adopted by the management.
2) It comprises of plans, methods and procedures for the
effective control of the operations of the business.
3) It comprises of internal check, internal audit, accounting
system and administrative control.
4) It is established by the management.
5) It intended to help the management to run the business
efficiently.

4. Objectives of Internal Control
1) To ensure that transactions are recorded proper books of
account.
2) See that all transactions are carried out only on account of
a sanction of authority.
3) See that management policies and decisions are properly
implemented.
4) To ensure efficient conduct of business.
5) To evaluate the efficiency of performance of the various
personnel.
6) To safeguard the assets of the organization.
7) To safeguard the interest of the organization.
8) To ensure reliability of accounting records.
9) To ensure the periodical verification of assets.

5. Types of internal control
Internal Control can be categorized as under:
1. Organizational
An entity should have plan of organization which should define and
allocate responsibilities, and identify the line of reporting.
In all cases, the delegation of authority and responsibility should be
clearly specified. An employee should always know the precise
powers delegated to him, the extent of his authority and to
whom, he should he report.
2.Segregation of duties
A single person should not handle recording and processing of a
complete transaction. Several persons should be entrusted with
these works.
Functions that should be separated are: initiation, authorization,
execution, custody, issues of delivery order, and recording.

6. Types of internal control
Internal Control can be categorized as under:
3.Physical
a) This concerns physical custody of assets and involves procedures
designated to limit access to authorized person only.
b) Access can be direct or indirect.
c) These controls are especially important in case of valuable,
portable, exchangeable, or desirable assets.
4.By Authorization and Approval
All the transactions should require authorization or approval by an
appropriate person.
The limits into these authorizations should be specified.
For example, all credit sales must be approved by the credit control
department or all overtime must be authorized by the works
manager.

7. Types of internal control
Internal Control can be categorized as under:
5.Arithmetical and Accounting
This can be achieved through arithmetical accuracy of records, and
checking of totals, reconciliations, control accounts, trial balance,
accounting for documents and preview.
6.By personnel
a) Procedures should be designed to ensure that personal
operating system are competent and motivated to carry out the
tasks assigned to them, as proper functioning of a system
depends upon the competence and integrity of operating
personnel.
b) Measures include appropriate remuneration, promotion and
career development prospects, selection of people with
appropriate personal characteristics and training assignment of
tasks to right levels.

8. Types of internal control
Internal Control can be categorized as under:
7.By Supervision
All actions by all levels of staff should be supervised. The
responsibility of supervision should be clearly laid down
and communicated to the person being supervised.
8.By management
a) These control exercised by the management, which are
outside and over and above the day-to-day routine of the
system.
b) They include overall supervisory controls, review of
management accounts, comparison with budgets,
internal audit and any other review procedures.

9. Advantages of Internal Control
A. Advantages to the business.
1)Provide accurate and reliable data to the management for
taking correct decisions.
2) Ensure that policies and procedures are complied with.
3) Promotes operational efficiency & helps to attain
organizational goal.
4) To safeguard the assets of the organization & to ensure
the reliability of accounting records.
B. Advantages to the auditors
1) Helps the auditor in framing the audit program.
2) To ascertain extent of test check can apply.

10. 1) It is Expensive.
2) Transactions of unusual nature may not be subject to
internal control.
3) Human errors remain in any system of control.
4) Limitation of preventing frauds committed through collusion
between persons.
5) It may not be keep pace with the change in the condition.
Disadvantages of Internal Control

11. Internal Check
Internal check is arrangement of the duties of staff members
of the accounting functions in such a way that the work
performed by a person is automatically checked by another.
In other words,
Internal check is and accounting procedure where routine
entries for transactions are handled by more than one
employee in such a way that the work of one employee is
automatically checked by another for the detection of errors
and irregularities.

12. Objectives of Internal Check
Objectives of internal control can be set forth as under:
•To minimize the possibility of error, fraud and irregularity.
•To prevent the misappropriation of cash and goods
•To allocate duties and responsibility to every clerk in the
organization so that, he may be held responsibility for their
particular fraud & errors.
•To ensure an accurate recording of all business transaction.
•To enhance the efficiency of the clerk in the organization.
•To exercise moral influence over the staff member.
•To prepare final account with an ease and efficiency.

13. Advantages of Internal Check
A. Advantages to business
1. Proper division of work
2. Fixation of responsibility
3. Greater efficiency of the staff.
4. Increased carrying capacity.
5. Early detection of errors and frauds.
6. Easy preparation of final account.
7. Truth and accuracy of accounting can be available.
B. Advantages to Owners
1. Genuineness and accuracy of the account.
2. Overall efficiency, economy in operations, increased profit etc..
C. Advantages to Auditor
1. There is no need for detailed examination of book of accounts.
2. It reduces burden.

14. Disadvantages of Internal Check
Internal check system is useful to every stakeholder of the
business even though it has some disadvantages which are
as follows:
1. Under internal check system, every staff wants to complete
her/his work in time. So, s/he performs work in hurry which
leads errors.
2. Under internal check system, once work is checked by
another staff, the latter detects errors and frauds. So, there
are chances of conflict between or among the staffs.
3. Small organizations cannot use internal check system
because it needs more staffs which increases the cost.

15. Internal Audit
“Internal audit refers to an independent appraisal(act of judging)
of activity within an organization for the review of accounting,
financial, and other business practices”.
It consists of continuous and critical (involving careful judgment)
review of financial and operating activities by the staff of auditors
functioning as a part of management and reporting to it and not
shareholders.
It involves regular and critical analysis of the functions of an
organization, for the purpose of recommending improvements. It is
aimed at assisting members of the firm in discharging their
responsibilities in an effective manner.

16. Objectives of Internal Audit
1) To check the accuracy and authenticity of the accounting
records.
2) To identify whether the standard accounting practices,
which are deemed to be pursued by the entity, are complied
with or not.
3) To ensure detection and prevention of fraud.
4) To examine that there is an appropriate authority for the
procurement and disposal of assets.
5) To verify that the liabilities are incurred only for business
causes and not for any other purpose.
6) To review the activities of the internal control system, so as
to report management regarding deviations and non-
compliances.

17. Advantages Internal Audit
The advantages of internal audit are as follows:
1. Staffs remain alert because their work shall be checked by the internal
auditor. So, accounting remains correct.
2. Internal audit helps to detect errors and frauds and provides
suggestions to improve them which help the management to take
corrective action.
3. Internal audit detects the misuse of resources in time which helps to
reduce unnecessary expenses.
4. Internal audit checks the efficiency of staffs which helps to increase the
efficiency of them.
5. Internal audit checks the books of accounts, detects errors and frauds
and helps in its correction which makes the act of final auditor easier.
6. Internal audit increases the morale of honest staff because evaluation
of performance of any staffs will be made at any time.

18. Disadvantages Internal Audit
Internal audit suffers the following limitations:
1. Internal audit is not possible to be adopted by small
organizations because the cost of running an internal
audit department is very high.
2. Internal audit department employees are the paid-staff of
the organizations. In most cases, they do have to work
accordingly to the directions of the management. So it not
expected that they will provide unbiased opinion on
financial statements.
3. As there is no prescribed qualification for the
appointment for internal auditors, less qualified persons
may get appointment in the department. They will not
able to discharge their duties properly.

19. It can be seen from above discussion that both internal
check and internal audit that they are parts of overall
control system.
Internal Control
(Total System)
Internal Check
(Sub-System)
Internal Audit
(Sub-System)

20. DISTINCTION
BETWEEN
INTERNAL CONTROL INTERNAL CHECK
AND
INTERNAL AUDIT

21. DIFFERENCE BETWEEN INTERNAL CONTROL,
INTERNAL CHECK AND INTERNAL AUDIT
Internal Control Internal Check Internal Audit
It is the whole system of
control established by
management.
It is the arrangement of
accounting work under
which the work of one
person comes under
another.
Continuous review of
records by staff appointed for the
purpose.
Scope is more. Scope of internal check
is less.
Scope of internal audit is
less that of internal
control wider than
internal check.
The objective is to
safeguard the asset of
enterprise.
Objective is to locate
errors and frauds.
The object of internal
audit is to assure the
management that the
system of internal
control and internal
check in operation are in
effective in design and
operation.

22. Internal Control Internal check Internal audit
There is no separate
staff.
There is no separate staff. It is conducted by the
staff specially appointed
for the purpose called as
internal auditor.
Internal control is
exercised when the work of
employees in progress.
Internal check is
exercised when the work of
employee is in progress.
It is undertaken by the
auditor after the work
has been completed.
Any organization can
adopt internal control.
Any organization can
adopt internal check.
Internal audit is adopted only
those concerns which really
need it.