Internal Control and Internal Audit

1. Internal Control

2. Internal Control
• Internal control refers to the set of
• Principles
• Procedures
• Practices
companies define to ensure they keep a
check on risk-causing factors and rectify
the same to avoid losses or frauds.

3. Internal Control Components in Real Life
Goal: Attend classes at 9 AM tomorrow.
Risks: Oversleeping, heavy traffic

4. To prevent heavy traffic from interfering with your class attendance,
you decide to leave early to give yourself extra commute time.
Leaving early is the control activity you put in place to ensure your timely attendance.
If you overslept the morning, the next time you might set a second alarm. If you had to
wake up and leave at an unrealistic time to attend the class, you may decide to stay in a
nearby hotel for the next training you attend.
Some everyday internal control procedures include:
• Locking your office when you step away from your desk
• ID cards
• Using passwords to restrict computer access;
• Locking your office or filing cabinets to discourage theft;
• Reviewing your monthly ledger reports to verify transactions.

5. Advantages
1. Detection of Errors and Frauds
2. Time Saving
3. Minimum Scope for Errors and Frauds
4. Operational Efficiency

6. 1. Transactions authorizations.
2. Efficient & Effective Transactions
3. Maintain accountability for assets.
4. Safeguarded from unauthorized access.
5. Regular Checking for differences.
6. To minimize error, fraud and irregularity
7. To prevent misappropriation.
8. To allocate duties and responsibility.
9. Accurate recording of transaction.
10. To exercise moral influence.
Objectives

7. Types of Internal
Control
Preventive Corrective
Detective

8. Preventive
• Preventive controls aim to decrease the chance of
errors and fraud before they occur,
• Examples of preventive controls include:
• Separation of duties
• Pre-approval of actions and transactions (such as a
Travel Authorization)
• Access controls (such as passwords and Gatorlink
authentication)
• Physical control over assets (i.e. locks on doors or a
safe for cash/checks)
• Employee screening and training

10. Detective
• Detective controls are a type of
internal control that helps
organizations detect errors or
irregularities.
• Examples of detective controls
include:
• Review of financial statements
• Reconciliation of bank accounts
• Physical inventory count
• Review of aged receivables

11. Corrective
• Corrective Control
• In this type of internal control audit, if you find a discrepancy,
it will take measures to prevent the recurrence of this error.
• Examples of corrective controls include:
• Implementing a new procedure to double-check inventory
levels after realizing that there have been several discrepancies
in the past
• Adding security cameras in an area that has experienced a
high level of theft
• Changing the locks on all doors after a break-in
•

12. Limitations
1. Manual Processes/Human Error
2. Lack of Accurate Data
3. Too Many Controls
4. Insufficient Resources
5. Management Override of Internal Controls
6. Collusion/Fraud

13. Internal Check
• The term internal check refers to
allocation of duties to the
employees in an organisation in
such a way that the work of one
person is automatically and
independently checked by the
other person from the beginning
to the end.

14. A transaction of sale may have to be split between various staffs like,
1. The preparation of invoice by Mr Ram,
2. The receipt of cash against the invoice by a third clerk Mr Sam,
3. The delivery of goods against the proof of receipted invoice
by another clerk, Mr Leo
4. Checking of outward movement of goods against delivery order by a clerk Mr Rio and
so on.
Example

15. Internal Check System When Cash is Withdrawn From Bank Against a Cheque

16. Firstly, the Cheque is produced at the counter where the clerk
issues a token and enters the token number on the back side of the
cheque and in the token book.

17. Secondly, the cheque is then passed on to the ledger clerk who verifies the credit balance
in the account of customers and makes the debit entry therein for the amount of the
cheque.
Thirdly, the cheque is sent to an officer, who compares the signature on the cheque with
the specimen signature of the account holder and passes it for payment.
Lastly, the cheque is then sent to the cashier who makes the payment against the
token and records it in the cash register.

18. Thus, withdrawal of cash from a bank account is undertaken by four different
persons such that work of one person is checked by other person in order to
avoid the occurrence of errors and frauds.
The system of internal check is exercised in such a way that no individual person
does the entire work and the process is in the following manner.

19. 1. Responsibility
2. Completion
3. Rotation of employees
4. Automatic check
5. Reliance
6. Safeguards
7. Supervision
8. Formal sanction
9. Periodical review
Essential Charteristics/Priciples Of A Good
System Of Internal Check

20. 1.To minimize the possibility of error, fraud, and irregularity.
2.To prevent the misappropriation of cash and goods.
3.To allocate duties and responsibilities to every clerk in the organization.
4.To ensure an accurate recording of all business transactions.
5.To enhance the efficiency of the clerk in the organization.
6.To exercise moral influence over the staff member.
7.To prepare a final account with ease and efficiency.
Objectives of Internal Check

21. 1.Moral Influence on Employees
2.Determination of Employees’ Liability
3.Less Possibility of Frauds
4.Increase in Efficiency
5.Auditing Made Easy
6.Final Accounts Can Be Prepared
7.Correct and Complete Records of all the Transactions
8.Detection of Dishonesty or Irregularity
9.Test Checking Possible
Advantages of Internal check

22. Principles of Internal Check
1.Allocate the process according to the duties, responsibilities, and rights.
1.No single person should have independent control
2.The duties should be changed from time to time
3.Every staff encouraged to go on leave at least once a year.
4.The division of work should not be much expensive.
5.The financial and administrative power should be assigned very judiciously to different
officers.
6.A person having physical custody of assets must not be permitted access to the account books.

23. Expensive
Slackness in the Work
Not Suitable for Small Concerns
Grouping among Employees
Disadvantages of Internal Check

26. It ensures that:
•Business transactions are accurately and appropriately recorded.
•Books of accounts are systematically maintained as per the relevant provisions.
•No possibility of manipulation of accounts and misappropriation of business
property.
Definition of Internal Audit
An Internal Audit is a form of control, whose aim is to measure and appraise the
effectiveness of other types of control. It involves the verification of business operations
by the staff specially appointed for the purpose.

27. Features of Internal Audit

28. Scope of Internal Audit

29. APPLICABILITY of Internal Audit
Sec 138 of the Companies Act, 2013