1 Aswathy V S Sr.DAG, O/o AG Lucknow
Internal control is the overall control environment established by management of an enterprise FFor effective & efficient monitoring/control of its operations tto provide reasonable assurance of meeting organization's objectives. 2
MMaximisation of net worth CCompliance with laws & regulations SSafeguarding assets OOptimising use of resources FFinancial & operational effectiveness PPrevention & detection of errors & frauds RReliability of financial reporting. *** 3
Appropriate division of functional responsibilities Proper authorisation Record of business transactions by persons competent to discharge their assigned duties It incorporates both the accounting and administrative controlsaccounting and administrative controls Internal check & internal audit are its vital components Internal check & internal audit 4
Methods n procedures related to safeguarding of assets n reliability of financial records System of authorization & approval of transactions Separation of duties regarding Record-keeping & accounting reports custody of assets etc Internal audit O&M concerned with operational efficiency Adherence to managerial policies Statistical analysis Performance reports Employee training programs 5
Such an arrangement of duties among staff that the work performed by one individual is independently checked by another in the routine course, so that errors & frauds are prevented, or discovered without delay. No one person is allowed to handle the transaction from beginning to the end. But its done by concernded sections itself. Aims at minimising error n fraud It’s a line function Continuous & systematic process of examining & reporting on the administrative systems and accounting methods. Confirms that the management policies are properly executed and are adequate its an appraisal done by separate section. Aims at discovering errors & frauds It is a staff function. 6
According to SAP-6 of ICAI, objectives are to ensure that transactions are executed in accordance with managements general or specific authorisation all transactions are promptly recorded, correctly so as to facilitate the preparation of final accounts assets are safeguarded from unauthorised access, use or disposition. The recorded assets are compared with the existing assets at reasonable intervals and appropriate action taken in case of difference. 7
Segregation of incompatible duties Physical security of assets and records IT security Authorisation & approval controls Arithmatical & accounting controls Personnel (like rotation of duties) Supervision (e.g., optimum span of control) 8
the work of the external auditor starts from assessing the internal control mechanism of the organisation under audit. Understanding, assessing & evaluating the system, identifying the strong and weak points Determine the degree of reliance of the internal control and accordingly plan the nature timing & extent of audit. If internal control is effective auditor can resort to selective verification Where-ever internal control is weak, detailed verification needed 9
MManagement philosophy & operating style MMgt’s commitment to internal controls including internal audit WWork culture & discipline IIntegrity, ethics & competence of entity’s personnel NNature of interaction between entity & its environment 10
Policy files Act & Rules Departmental & Office manuals Office orders Best practice guides & books User & system requirement specifications 11
Identify organisational objectives Study control system vis-à-vis objectives Determination of established control mechanism. Compliance and substantive audit tests. Evaluation Communication of the weaknesses of the internal control system to management Prioritise criticality of sub-systems vis-à-vis organisational objectives. Detailed audit and its report. 12
Management override/complacency Environmental pressures Cost factor Collusion Human mistakes Judgment errors Hence, internal controls offer reasonable assurance, not absolute assurance. 13
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