Objectives, Limitations and Evaluation of Internal Control


Objectives of Internal Control

Internal control relating to accounting system is concerned with achieving objectives such as:
1. Transactions are executed in accordance with proper authorization.
2. All transactions and other events are promptly recorded at the current amount, in the appropriate accounts and in proper accounting period so to permit preparation of financial statements in accordance with an identified financial reporting framework.
3. Access to assets is permitted only in accordance with proper authorization.
4. Recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with regard to any difference.

Limitations of Internal Control
Internal control system has the following inherent limitations:
1. Management’s usual requirements that the cost of an internal control does not exceed the expected benefits to be desired.
2. Most internal controls lead to routine transaction rather than non-routine transaction.
3. Potential for human error in the operation of internal control due to carelessness, distraction, mistakes of judgement and the misunderstanding of instructions.
4. Possibility of control being by-passed due to collision of two or more persons, whether inside or outside the entity.
5. Possibility that a person responsible for exercising an internal control could abuse that responsibility by overriding and internal control.
6. Possibility that procedures may become inadequate due to changes in conditions, and compliance with procedures may deteriorate.

Evaluation of Internal Control
The evaluation of internal control by an auditor is necessary. There are no set rules for such evaluation. However, there are enquiries which have to be made. The auditor while making such inquiries should select actual transactions in order to determine the proper functioning of systems, procedures and polices. The auditor is to ensure that these procedures are not on paper only but are in fact in operation.

First inquiry would be whether there are any documents in the form of manuals, charts, circulars, forms, etc, laid down by the organization that are to be followed within the organization. This record will assist the auditor in ascertaining whether there is functional regression of duties between responsible personnel.

Enquiry regarding financial and accounting procedures will be made to ensure whether the transactions are properly received to establish the propriety of the transactions and accuracy in their recording. This enquiry will help the auditor to determine whether the flow of process helps in detection and reduction of errors.
Enquiry about the financial statements will enable the auditor to find out.

(a) The responsibility and authority of person reporting.
(b) Performance of personnel and the organization.
(c) Review of transactions.
The auditor for the purpose of evaluation will find the following facts:
1. Whether the system ensures the accuracy of records and financial statements.
2. Whether the system prevents or detects errors.
3. Whether the system prevents or discloses losses occurring due to negligence, inefficiencies or inadequacies.
4. Whether the system ensures compliance with set policies.

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