Department of Management Sciences, National University of Modern
Languages Multan Campus
Assignment
Submitted by:
Shahraz Mushadi
Roll NO: 31466
Subject: CG
Submitted to: Sir Dr. Rao Akmal
Class: MBA (3.5)6th Evening
Summary
Chap #09 Internal Control
Internal Control
Internal control may be defined as “the whole system of controls, financial and
otherwise, established by the management of a company, under directives from its
Board in order to:
a. Carry on the business of the company in an orderly manner.
b. Safeguard its assets.
c. Secure as for as possible, the accuracy and reliability of its records.”
Objectives of Internal Control
a. The company receives and records in its accounting books all the income or
revenue to which it is entitled.
b. All expenditure is properly authorized and recorded.
c. All assets are properly recorded and safeguarded, i.e. their acquisition, usage
and disposal is duly authorized and in accordance with company’s policies
and requirements.
d. All liabilities are properly recorded and provision is made for all known or
expected losses.
e. Company’s operations are carried out in accordance with its policies and
towards achievement of its objectives.
Components of Internal Control
COSO defines internal control as having five components:
Establishing a Control Environment
Regular Risk Assessment
Putting in Place an Information and Communication System
Defining Control Activities
Instituting a Formal system of Monitoring
Roles and Responsibilities in Internal Control
Each major entity in corporate governance has a particular role to play this includes:
Board of Directors
Managers
Specific employees like internal audit, audit committee quality control
officers, complaint offices etc.
Employees in general
Tools of Internal Control
1. Basic Controls
a. Drawing up details procedures for carrying out the various duties and setting
limits for approval and expenditure authorities etc.
b. Pre numbering of primary documents such as sales invoices receive checks
credit note etc. and keeping a full account of numbers so that any missing
documents is immediately noticed.
c. Maintaining total or control accounts to provide overall control over
subsidiary ledgers.
d. Checking of one document against another.
e. Regular verification of physical existence of the assets to their respective
records.
f. Regular balancing of ledger and extraction of trial balance to check on the
arithmetical accuracy.
g. Making proper arrangements for physical custody of assets, significant
documents and other valuable items.
h. Most importantly choosing the right persons to jobs and keeping them
motivated to do their best.
2. Supervisory Control
a. Authorizations of documents after examination and checking by a
responsible officer Before any further processing takes place.
b. Final approval of documents after they have gone through the basic control
but before the action authorized by them actually takes place.
c. Pre-audit of major expenditures or disbursement in particular capital
expenditure involving large sums of money must be audited before
commitment to expenditure is made and also before the actual payment is
made.
3. Internal Check
a. There should be a well-defined division of responsibilities is between
departments sections and individual so that no one person handles a
transition from its beginning to its end.
b. Each employee should be given the precise limits of his responsibilities and
authority, preferably in writing. similarly, all procedures should be
documented.
c. Where practical staff should be rotated in various jobs so that no one person
deals with one aspect of a transaction for too long.
d. Employees should be encouraged to take their annual leave. If an employee
is reluctant to do so, his area should be carefully checked by internal auditors
and if possible he should be rotated to another job.
4. Internal Audit
This is very effective role of internal control through it is available only to large scale
companies who can afford the expense of setting up an independent internal audit
department. In order to ensure that an internal auditor is able to retain his
Independence from the manager of whose work he audits the internal audit
department is not made a part of the accounts department. The general
arrangements are that an auditor reports administratively to the CEO and the
functionally to chairman of the audit committee.
Duties of Internal Auditor
a. Regular examination power of all accounting records checking it against
source documents
b. Verifying that all documents are properly authorized before being acted upon
by ensuring that are basic and supervisory control are in place and are
actually working.
c. Reviewing on a continuous basis the internal control procedures and methods
to ensure that these are regularly improved upon and revised in light of
changing circumstances.
d. Keeping the management aware of internal control efficiency or weakness
and to assist in improving where necessary.
Reliance of External Auditor on Internal Auditor
1. Draw up internal control policy. this is done at board level as a part of its
function of risk management.
2. Design the overall internal control systems for each division or department of
the company.
3. Documents procedures i.e. draw up formal procedure manuals for each group
of activities.
4. Train the staff in the prescribed procedures to ensure that they understand
and follow them.
5. Ensure that the procedures are being faithfully followed. One way of ensuring
it to Institute internal audit and internal check.
6. Curb exceptions. as far as possible no exception to the laid down procedure
should be permitted.
Reporting by Board on Internal Controls
While the Pakistan code of corporate governance issued by a SECP is relatively silent
on this aspect the combined Code of CG of UK and Turnbull guidelines prescribe that
the company's annual financial report must include a statement from its board of
directors on its internal controls, either as separate statement or within the body of
Chairman's report covering the following:
Risk assessment
Control environment
Information and Communication
Monitoring
Whistleblowing
Lord Borrie QC prescribe the following definition of whistleblowing in 1995: “the
disclosure by an employee of confidential information which relates to some danger
fraud or other illegal or unethical conduct connected with the workplace be it of the
employer or of fellow employees.”
Classification of Whistle Blowers
Tipster: Generally, an anonymous person who simply sends a trip or piece of
information about an alleged wrongdoing.
Squealer: A person who has a direct knowledge of wrongdoing mainly
because he participated in it and is now exposing it.
Witness: A person who formally supplies information under an oath.
Complainant: A person who is aggrieved by an incidence of wrongdoing and
is willing to provide information on it.
Mischief Maker: A person who alleges wrongdoing without having any real
substantive evidence generally to level personal scores.
Watchdogs: A group of individual whistleblowers who bound together to
provide information to general public and government about an alleged
wrongdoing in an organization or industry.
Reporter: generally, and outsider who makes a profession of reporting on
wrongdoings in various organizations.
