The system of control of all aspects of the business and its transactions is known as internal control Normally, internal control implies controlling the internal work of the business in such a manner that profits are maximized and the possibility of manipulation, frauds, forgery, etc. are minimized.
The system controls each aspect of the business in a planned
manner and through this system, all activities the whether economic or non -
economic, are controlled.
Apart from control relating to research, personnel, and
administration all other controls relating to the accounts are included in
internal control does not mean only internal check and internal audit but the
whole system of control, financial and otherwise established by the management
in order to carry on the business of the company in an orderly manner,
safeguard its assets and secure as per as possible the accuracy and reliability Hence, whatever be the kind of control, whether economic or related to the
management of the concern is included in internal control.
The word internal control is used in the wider sense and
includes all other controls such as internal audit, internal check, etc.
Definitions
The following are a few of the important definitions of
internal control
According to Spicer and Pegler, " Internal control is
best regarded as indicating the whole system of control, financial and
otherwise, established by the management in the conduct of business, including
internal check, internal audit and other forms of control. "
According to Howard Stettler, " Internal check and
internal audit comprises the principal means by which business management
maintains internal control over the extensive activities and operations for
which it is responsible
As per W.W. Bigg, " Internal control is best regarded
as indicating the whole system of controls, financial and otherwise,
established by the management in the conduct of the business, including
internal check, internal audit and other forms of control. "
Types of Internal Control
Auditing Internal Control can be divided into the following
three parts with each part being equal important :
·
Accounting Control
·
Administrative Control
Organisational Control
For any kind of organisational control, it is necessary to
understand the organisational structure and the mutual relationships among the
various divisions or departments.
By doing so the auditor can define the scope of his work and
can proceed with the actual audit. Hence, it is the duty of the auditor to
understand the structure of the organisation very clearly. He should plan his
work only after knowing who all are the officers in the organisation and what
are their responsibilities.
Accounting Control
This includes various kinds of controls such as Accounts
Control Standard Cost Control, Budget Control, etc. It is not necessary to
describe each of these in detail here.
Administrative Control
Administrative control is needed in order to maintain
efficiency in the work done in the office. Examples of administrative controls
are Cost Financial Control, Control Accounts, etc.
All such controls meant for maintaining the total accounts
in relation to personal ledgers, using machines for examining cash receipts,
for the accounting of wages, using time recording clocks for the accounting of
time, etc., are included in internal control.
If the internal control system has been implemented
successfully it makes the work of the auditor a lot easier and the need for
routine checking is also reduced.
Through internal control, adequate emphasis is laid on the
assets of the business, the accounts of the business, management policies,
etc., and this increases the efficiency of the business.
Objectives of Internal Control
The following are the main objectives of internal control.
·
Providing for the safety of the assets of the
business by comparing the actual assets with those being shown in the books of
accounts from time to time, and ensuring that only persons duly authorized by
the management has access to the assets.
·
Examining the accuracy of the accounts and
ensuring that transactions are being recorded correctly.
·
Establishing responsibility centers and
establishing the responsibility in relation to every activity.
·
Comparing the standards set by Internal Control
with the actual activities and establishing and removing the deviations
therein.
·
Ensuring compliance with the policies of the
management and ensuring that transactions are being entered into in accordance
with the methods prescribed by the management.
·
Increasing the efficiency of work, by increasing
the efficiency of material, labor, plant, and capital and improving the running
of the business.
Basic Principles of Internal Control
Accounting of Assets
The work physically utilizing any asset should be separated
from the work of accounting for the same.
Division of Work
The division of work between employees should be such that
work done by one is automatically checked by another, i.e., the result of the
work done by one should match the result of work done by another. Hence
internal control is a system through which the functioning of a business organisation
can be made more controlled, efficient, and useful.
Forms of Internal Control
The system of internal control and its actual structure is
decided by the management. It is the job of the management cadre to decide how
the work is to be divided and what is the amount of controlling each task
requires.
As far as the auditor
is concerned he starts his work only after studying the internal control system
thoroughly and only then does he prepares his work schedule.
The following are the various forms of internal control :
Cash Control
There are three main tasks relating to cash, namely :
(i ) receiving cash, ( ii ) paying cash, and (
iii ) maintaining cash balance.
All three tasks are very important and it is necessary to
have clear written instructions for employees dealing in cash.
The correct and just division of responsibility among
employees ensures that work proceeds smoothly and there are no alterations among
the employees. Normally, cash is embezzled by two or more than two employees
acting together, and this fact should be kept in mind while planning and
dividing responsibility
General Financial Control
General financial control includes the system of maintaining
accounts, efficient control of employees ( leading and supervision ), cordial
relationship with employees, etc. A system of financial control is necessary
for every organisation whether large or small.
Control regarding Trade Transactions
This includes
transactions such a sales, purchases, etc. There should be clear and specific
regulations for the purchase and sale of goods, only then can the pilferage of
goods be eliminated. Purchase of goods, receipt of goods, protection of goods
in hand, and maintaining accounts of the same are all very important tasks, and
even a little laxity in them may result in misappropriation of goods.
In the same manner as
sales, there should also be a proper system for the sale of goods such as the
right to sell goods, the custody of goods, and maintaining the accounts for the
sale. There should also be proper systems for accounting for purchase and sales
returns.
Control regarding Employees Remuneration
Even if there is a small lapse in the system of paying salaries and wages to the employees of the
organisation , cash can be misappropriated very easily. hence there should be a
proper system consisting of clear regulations and efficient techniques in
relation to this task.
Special orders
relating to increases in salaries or wages, deduction, and recovery of advances
should be clearly adhered to.
Control regarding
Fixed Assets
The majority of the capital in the organisation is usually
invested in fixed assets. Such assets are usually very costly and hence there
is a greater possibility of committing fraud in relation to such assets. There
should be adequate control on the right to receive fixed assets, a proper
system of accounting, provision for depreciation, etc. so that the balance
sheet of the organisation depicts a true and fair view of the state of affairs.
Control regarding Investment
The fraud in relation to investments is usually committed by
high-ranking officials and hence the owners of the business should devise a
special system for controlling investments.
Control regarding Stock
Stock includes raw material, work in progress, and finished
goods. In relation to stock, the control system in each organisation is
different. There should be an appropriate system for controlling the receipt of
goods, issue of goods, and safety of the goods in stock. In every organization, physical stocktaking should be carried out at a fixed interval Internal Control and Auditor
Before relying completely upon the system of internal
control the auditor should first check the level of efficiency. For doing this
he should acquaint himself with the organisation chart of the organisation ,
the performance manual, the plan of work allocation, and the actual physical
handling of work. Hence, the auditor should examine the internal control system
in detail.
During this examination, he should lay special emphasis on
the following aspects :
·
The auditor should study the production,
business, and administrative activities and should also study the nature of
activities of receipt and despatch of goods and cash.
·
The auditor should study the methods of
bookkeeping and accountancy. In this context, the system for receipt of goods,
cash, and other assets should be examined.
Also, special emphasis should also be given to the payment
of cash so as to ensure that cash is not paid without the receipt of any goods
or services. In the same manner, it should be ensured that no gods or services
have been rendered to any person without receiving payment for the same.
·
The internal control system should also be
examined in relation to the entries being made in the books of accounts. The
balance in the accounts of various persons and organisations should be tallied
with those in total accounts.
·
Through the selection of representative items in
the accounts, the actual operation of the internal control system should be
checked.
Through the use of procedural tests, nature and causes of inaccuracies should be found out so as to establish to what extent the accounts present a true and fair view of the state of affairs of the business. A good and effective system can reduce the workload of the auditor but it does not reduce his responsibility in any manner.
To what extent the auditor depends upon the system of
internal control, Depends upon the circumstances of the organisation and the
nature of transactions.