What is internal control System and define its nature
Nature: Internal
control is not necessarily a control over finance only. Its scope is wider. It
covers the control of the whole management system. The control may be financial
or even non-financial. But the main objectives are to safeguard all the assets
of the entity, to run the business smoothly and to have accuracy and
reliability of all the records. So the control may spread even to the books of
accounts. The internal control may be in respect of production or even quality.
The internal
control is the responsibility and function of the management. The management is
responsible not only for establishing an adequate system of internal control
but also to see that such an adequate system is maintained throughout. Where
internal control is good, the recording of fictitious or fraudulent
transactions would be rare. Chances of fraud in accounts or in documents would
be reduced to the minimum. Where, however, there is no system of internal
control or such a system in inadequate, the chances of fraud and error may be
more.
The auditor
should study and evaluate the internal control existing in the organization of
the client. He should ascertain whether the system is adequate or otherwise. On
the evaluation of internal control will depend the extent of the test checks
which the auditor may apply during the audit of such organization.
International
Control Defined
Internal control
system is defined by ISA as follows:
“The internal
control system means all policies and procedures (internal control) adopted by
the management of an entity to assist in achieving management objective of
ensuring, as far as practicable the orderly and efficient conduct of its
business, including:
a. Adherence to
management policies.
b. Safeguarding
of assets.
c. Prevention
and detection of fraud and error.
d. Accuracy and
completeness of accounting records.
e. Timely
preparation of financial statements.
2. Millichamp
has defined the expression internal control as:
Internal control
system—the whole system of controls, financial and otherwise, established by
the management in order to carry on the business of the enterprise in an
orderly and efficient manner, ensure adherence to management’s policies,
safeguard the assets and secure as far as possible to completeness and accuracy
of the records.
Note: The
individual components of an internal control system are known as controls or
internal controls.
From the above
definition the following salient points emerge:
a. Whole system:
Internal control can be seen as a whole system rather than as single system.
b. Financial and
otherwise: Financial includes the use of control accounts and otherwise
includes physical access restriction to computer terminals.
c. Established
by management: Internal control is established by management either directly or
by means of external consultants, internal auditor accounting personnel.
d. Carry
on-efficient manner: This is acceptable to every business.
e. Ensure
adherence to management policies: Budget or selling prices are expressions of
management policies and adherence to them can be achieved by variance analysis.
f. Safeguarding
assets: Assets are not to be allowed to be broken, lost or stolen – there must
be locks and keys. An assets register should be kept. The debtors’ balances
should be reviewed regularly.
g.
Secure-Completeness: All transactions should be recorded and processed.
h. Accuracy of
records: This includes the checking of work of one person by another.
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