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Internal control

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This file will provide you the basic details of internal control under auditing in a summarized and concise form.

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Internal control

  1. 1. INTERNAL CONTROL  Internal control is a process effected by plan management, BOD and other personnel, and those charged with governance, and designed to provide reasonable assurance regarding the achievement of objectives in the following categories :-  reliability of financial reporting.  Compliance with laws & regulations.  Effectiveness & efficiency of operations.  Internal Control is also necessary for survival of an organization's success.
  2. 2.  A system of controls, financial and otherwise established by management in order to carry on the business of the company in an orderly and efficient manner to ensure the adherence to management policies, safeguard the assets, and secure as much as possible the completeness of an internal control system – De Paula  Internal controls as a system comprising of controls environment and procedures. It includes polices and ways adapted by management of an enterprise to assist it in achieving its objectives – The International standards of Auditors.
  3. 3. INTERNAL CONTROL OBJECTIVES  Authorization  Completeness  Accuracy  Validity  Physical Safeguards and Security  Error Handling  Segregation of Duties
  4. 4. INTERNAL CONTROL ELEMENTS monitoring Control activities Risk management Control environment Management’s objectives Information & communication
  5. 5. ADVANTAGES OF INTERNAL CONTROL  Increase in operational efficiency  Accurate Recording  Safeguarding Assets  Compliance  Protection of Employees
  6. 6. INTERNAL CHECK  Checks on the day-to-day transactions which operate continuously as a part of the routine systems.  The main objective of internal check is prevention of errors and frauds and/or detection of errors and frauds at the earliest.  It also ensures efficiency of the accounting system followed by the organization and enables easy preparation of financial statements.  Internal check discourages fraud and collusion among employees by instilling a fear of detection in their minds.
  7. 7. DIFFERENCE BETWEEN INTERNAL CHECK AND INTERNAL AUDIT Basis Internal check Internal Audit Way of checking Automatic specially Cost involvement No yes Time of checking When work is being done After the work is done Thrust of system To prevent errors To detect error & frauds
  8. 8. DIFFERENCE BETWEEN INTERNAL CONTROL AND INTERNAL AUDIT Basis Internal control Internal audit Meaning Independent & consulting activity designed to add value & improve organization’s operations. System of control established by the management to carry on business in efficient manner. Nature Broader Concept Narrower concept Scope Compulsory As per suitability of the organization Objectives To prevent the occurrence of fraud A backward looking activity
  9. 9. TECHNIQUES OF INTERNAL CONTROL SYSTEM  Preventive Controls techniques- designed to discourage errors or irregularities from occurring. They are proactive in nature that helps to ensure departmental objectives are being met. Ex-  Segregation of Duties  Approvals, Authorizations, and Verifications  Security of Assets  Detective Controls techniques- designed to find errors or irregularities after they have occurred. Ex-  Reviews of Performance  Reconciliations  Physical Inventories  Internal Audits
  10. 10. AUDIT TESTING  An audit test is a procedure performed by either an external or internal auditor in order to assess the accuracy of various financial statement assertions. The two common categorizations of audit tests are substantive tests and tests of internal controls  A substantive audit test is a direct test that validates a financial statement balance, while internal control tests are focused on key controls, such as management reviews or standardized templates that are designed to prevent and detect material misstatements  Audit tests typically are performed on a sample basis over an existing group of similar transactions. Sampling approaches can either be statistical or non-statistical.
  11. 11. SAMPLING IN AUDIT TESTING  a process of selecting a subset of a population of items for the purpose of making inferences to the whole population. Need for Audit Sampling 1. Developing a consistent approach to audit areas; 2. Providing a framework within which sufficient audit evidence is obtained; 3. Forcing clarification of audit thinking in determining how the audit objectives will be met; 4. Minimizing the risk of over-auditing; and 5. Facilitating more expeditious review of working papers
  12. 12. STATISTICAL SAMPLING IN AUDIT  Statistical sampling involves the random selection of a number of items for inspection and is endorsed by the accountancy bodies.  In statistical sampling, each item has a calculable chance of being selected.  Statistical sampling allows an auditor’s judgment to be concentrated on those areas of the audit where it is most needed.  It allows the quantification of key factors and the risk of errors.  This is not to suggest that statistical sampling methods remove the need for professional judgment, but rather that they allow elements of the evaluation process to be quantified, measured and controlled.
  13. 13. INTER-FIRM COMPARISON  It is technique of evaluating the performance, efficiency, costs and profits of firms in an industry.  It consists of voluntary exchange of information/data concerning costs, prices, profits, productivity and overall efficiency among firms engaged in similar type of operations for the purpose of bringing improvement in efficiency and indicating the weaknesses. Such a comparison will be possible where uniform costing is in operation.  An inter-firm comparison indicates the efficiency of production and selling, adequacy of profits, weak spots in the organization, etc. and thus demands from the firm’s management an immediate suitable action.  Such a comparison may be carried out in electrical industry, printing firms, cotton spinning firms, pharmaceuticals, cycle manufacturing, etc.
  14. 14. INTRA-FIRM COMPARISON  comparison among different units/products/strategic business unit (SBU) of a firm.  This comparison is possible only when uniform costing methods and practices are being adopted by all units and SBUs.  Intra firm comparison helps the management in identifying the units/Strategic SBUs which have not been performing as per the internal benchmark or standards achieved by other units SBUs.  This comparison is difficult sometime when the firm is dealing in different product/sectors and their working conditions are significantly different.
  15. 15. AUDIT IN DEPTH  checking a transaction extensively from origin to end.  It is an audit technique which is used to evaluate the effectiveness of internal control system in an organization.  It is used in investigation exercises whereby the objective is to thorough examination of transactions or records.  Also known as vertical vouching as against horizontal vouching.

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