INTERNAL CONTROL

Internal control is regarded as the whole system of controls, financial and otherwise established by the
management in the conduct of a business including internal check, internal audit and other forms of control.
“According to American Institute of Certified Public Accountants:” Internal control comprises of the plan of
organization and all the coordinate methods and measures adopted within a business to safeguard its assets,
check the accuracy and reliability of its accounting data, promote operational efficiency and to encourage
adherence to prescribed managerial policies.”
 Internal control comprises of the policies and procedures adopted by the management of an entity to
assist in achieving the following objectives:
(a) Orderly and efficient conduct of business.
(b) Adherence to management policies
(c) Safeguarding of assets
(d) Prevention and detection of fraud and errors
(e) Accuracy and completeness of accounting records
(f) Timely preparation of financial statements

 OBJECTIVES
To encourage adherence to prescribed policies: The system of internal control is introduced to provide
reasonable assurance that the various plans, policies and procedures laid down by the entity are being
followed.
To avoid frauds and errors: The main objective of any control system is to detect and prevent frauds and
errors by keeping an inherent check.
To promote operational efficiency: The internal controls within an organization are meant to prevent
unnecessary duplication of efforts, protect against waste and discourage any inefficient use of resources of
the organization.
To safeguard assets and records: The other important objective of internal control system is to safeguard
the assets and records from unauthorized access, use and disposition.
To provide accurate and reliable data: The internal control system ensures that all the transactions are
recorded in the correct amount, in the appropriate account and in the accounting period to which they relate.
To assist in timely preparation of Financial Information: Information is of no use if it is not provided in
time. Internal control system facilitates timely preparation of financial statements.

Internal Control and Auditor

The introduction of internal control system in the organization is basically the responsibility of the
management. However, it is a matter of great interest for the auditor. The auditor should study and evaluate
the system of internal control so as to decide the degree of reliance that can be placed on the internal control
system. If there is an efficient internal control system, the auditor can rely on the same and his work
becomes easy. But it, in no way, means that the auditor can take shelter behind internal control system and
shirk his responsibility. The whole responsibility is on the auditor to do his work carefully and efficiently.

Review of Internal Control System

Internal control system should be reviewed by the Auditor before star audit as described below −
 Reviewing the system of accounting entries, whether recorded as per accounting standard or not.
 To frame audit program according to present circumstances.
 Frauds, errors and mistakes are likely to be located or not.
 To review existence of internal audit program and to check the efficiency of internal control system.
 To review the reliability of reports, records and certificates as presented by the management.
 To check if there is any possibility of improvement in existing internal control system.
 INTERNAL CHECK
Internal check is used as tool for executing internal control. It is the arrangement of duties of staff in such a
manner that the work of one person is automatically checked by another which minimizes the chances of
errors and frauds.
“Internal check may be defined as an arrangement of accounting routine that errors and frauds are
automatically prevented or discovered by the very operation of book keeping itself”.
Internal check is a part of overall internal control system.
Internal check is related to the job allocation aspect of control system.
Internal check is an inbuilt check in the accounting process itself.

According to Spicer and Pegler:

“A system of internal check is an arrangement of staff duties whereby no one person is allowed to carry
through and to record every aspect of the transaction, so that without collusion between two or more persons,
fraud is prevented and at the same time the possibilities of errors are reduced to the minimum.”

 Main Objects
Internal check in an organization serves the following purposes:

 It helps in arranging the duties in such a way that work of one person is automatically checked by another
or work of one person is complementary to another and there is no duplication of work.
 The work is divided in such a way that no transaction is left unrecorded.
 It ensures the reliability and accuracy of information provided by accounting system.
 It reduces the chances of errors and frauds as there is automatic checking.
 It helps in fixation of responsibility as there is a clear division of work.
 It helps in increasing the efficiency of accounting staff as the work is divided among individuals
according to their capacity and qualification.

 Advantages
Following are some of the advantages of internal check:
 It helps in putting moral check on the members of staff and helps in increasing integrity.
 It helps in fixation of responsibilities of employees. The member of the staff may be held responsible for
the irregularity caused by him.
 The chances of frauds are less under the system of internal check as it helps in detecting errors and frauds
at initial stages.
 The concept of internal check is based on division of work, therefore, it helps in increasing efficiency.
 Any irregularity in the system can be detected at an early stage without doing much damage to the
system.
 It automatically helps in making correct and complete record of all the transactions on each balancing of
the books of account.
 It helps in speeding up the audit task because it facilitates test checking.
 In internal check system, the financial statements are prepared without any loss of time.

 Disadvantages
 The system of internal check is suitable in a big organization. The small organization cannot afford it
because it is expensive.
 Lack of coordination among the staff may not serve the purpose.
 Most of the time, an auditor believes the system to be effective; therefore, prefers test check rather than
thorough check and works carelessly.
 Internal check does not guarantee the prevention of all errors and frauds. There always remains a
possibility of different employees joining hands to mastermind fraud.
 Duties of an Auditor in respect of Internal Check
The auditor should consider the system in force in the concern by following procedure:
 A written statement should be received from the company regarding the system of internal check.
 The auditor should assess its effectiveness instead of simply relying on its working.
 He should find out the deficiencies, if any, which may result into errors or frauds.
 An auditor may depend upon the effectiveness of the operation of the system only to a certain extent
which is primarily based on the size of the business concern.
 In case the auditor is not satisfied through the test checking of the transaction, he may conduct careful
analysis.
 Test checking of cash transaction should be avoided by the auditor even if he finds effective internal
check system in force.
 If the system in force is not efficient, then the auditor can suggest ways to avoid the defects. In case his
suggestions are not implemented, he should clearly state the concern that he should not be held
responsible for any error at later date.

Internal Check vs Internal Control

Internal control system consists of various controls set up by the management for conducting
business. It includes internal check, internal audit and other forms of control. The distinction
between internal check and internal control is summarized below:
Difference between Internal Control and Internal Check

Basis of Internal Control Internal Check

Difference

1. Meaning It consists of the whole system of It is an arrangement of duties among the

controls, financial or otherwise, employees in such a manner that the
established by the management to ensure work done by one employee is
smooth functioning of business of the automatically checked by other
company. employee.

2. Scope It is wider in scope and application. It It is a narrower in scope and application.

includes internal check.

3. Objective The main objective is safeguarding of The main objective of internal check is
assets, accuracy of records and adherence prevention of errors and frauds and
to management policies. fixation of responsibilities.

4. Flexibility Internal control system is more flexible as It is less flexible. It more or less remains
it is reviewed for the change in stable.
circumstances

INTERNAL AUDIT
Internal audit is review of operations and records undertaken within a business by internal staff or outside
agency specially deputed for this purpose. This review may be periodic or continuous. It is an important tool
in the hands of management. It is a type of control which functions by evaluating the effectiveness of other
types of controls.

According to the Institute of Internal Auditors, USA,

“Internal auditing is an independent appraisal function established within an organization to examine and
evaluate its activities as a service to the organization. The purpose is to assist members of the organization in
the effective discharge of their responsibilities. Thus, internal auditing furnishes them with analysis,
appraisals, recommendations, counsel and information concerning the activities reviewed.”

Scope and Objectives

 To review the internal control system.
 To review the custodianship and safeguarding of assets.
 To review the compliance with plans, policies, procedures and regulations.
 To review the relevance and reliability of information.
 To review the utilization of resources.
 To review the accomplishment of goals and objectives.

Objectives of Internal Audit

The main purpose or objective of an Internal Audit comes as the provider of objective information to the
upper management, government bodies, etc. Such objective information includes that of the control over the
environment, risks for the organization, and much more. Each of the individuals who come for the Internal
Audit are known as Internal Auditors, who are themselves sent by their organization.
Proper Control: To keep proper control over the organization is one of the main objectives of an Internal
Audit. The authenticity of the financial records and the efficiency of the firm have to be maintained and the
management needs proper assurance. The Internal Audit helps to establish both.
Perfect Accounting System: The accounting system of the organization is thoroughly checked by an
Internal Audit. From vouchers to the authority of transactions to accuracy in mathematics all serve the
purpose of Internal Audit. All entries are verified so that the chance of mistakes or frauds can be reduced.
Review of Business: The financial and operational aspects of a business is to be checked by the Internal
Audit. The Internal Audit process checks out the mistakes, strengths and weaknesses in the business.

Asset Protection: Internal Audit process performs the valuation and verification of an asset. In case of any
special transactions like purchase, sale or revaluation of assets, the authorization is audited particularly by
Internal Audit.
Keep a Check on Errors: There will be mistakes in financial records and is checked at the end of a
financial year. But with Internal Audit, the mistakes are spotted and rectified immediately.

Detection of Fraud: This is another main purpose of Internal Audit. In fact, Internal Audit is helpful to the
organization because due to its presence, an employee is less likely to do any fraudulent activity. There will
be no time in making fraud and how the Internal Audit process will run and so this will end up committing
less fraud in an organization.
Difference between Internal Check vs. Internal Audit

Basis of Internal Check Internal Audit

Difference

1. Meaning It is an arrangement of duties in such. a It is an independent review of

manner that work done by one person is internal controls, accounting record
automatically checked by another in the and actual performance.
normal-course of work.

2. Objective To prevent errors and frauds. To detect errors and frauds.

3. Nature It is device for doing work. It is devise of checking work.

4. Timing It is conducted during the course of a It starts after the transactions are
transaction. recorded.

5. Check It is a simultaneous check. It is a post-mortem check.

6. There is no need of any new appointment Internal audit is done by the staff
Appointment in case of internal check. specially appointed for this purpose.
of Employees

7. Scope It has narrow scope but its scope remains The scope may vary from business
more, or less same everywhere. to business and from organization
to organization.

AUDIT PROGRAMME

MEANING OF AUDIT
PROGRAMME:
An audit programme is a
detailed, written statement
designed by the
auditor indicating the work to
be performed by the audit
assistants,
specifying the time limit for
completion of work,
instructions and
guidance to the audit staff. In
short, it is a tool for planning,
directing
and controlling the audit work.
An audit programme is a
detailed plan of the auditing
work to
be performed. It specifies
the procedures to be
followed in the
conduct of audit more
efficiently. The auditor
outlines the whole
procedure of audit from
beginning till the finalization
of audit report.
Audit programme is generally
contained in the audit
notebook.
MEANING OF AUDIT PROGRAMME:
An audit programme is a detailed, written statement designed by the auditor indicating the work to be
performed by the audit assistants, specifying the time limit for completion of work, instructions and
guidance to the audit staff. In short, it is a tool for planning, directing and controlling the audit work. An
audit programme is a detailed plan of the auditing work to be performed. It specifies the procedures to be
followed in the conduct of audit more efficiently.
The auditor outlines the whole procedure of audit from beginning till the finalization of audit report. Audit
programme is generally contained in the audit notebook.

Definition:
Prof. Meigs defines an audit
programme as, “an audit
programme is
a detailed plan of the auditing
work to be performed,
specifying the
procedures to be followed in
verification of each item and
the financial
statements and giving the
estimated time required.”
Definition: Prof. Meigs defines an audit programme as, “an audit programme is a detailed plan of the
auditing work to be performed, specifying the procedures to be followed in verification of each item and the
financial statements and giving the estimated time required.”

Features of an Audit
Programme:
The features of an audit
programme include the
following
Features of an Audit Programme:
The features of an audit programme include the following

It is a set of procedures to be
adopted to conduct the audit
more efficiently.
2. It is a written scheme
designed by the auditor.
3. It is a blue print of the
audit work.
4. It facilitates delegation
of work, based on the
capabilities of
audit staff.
5. It acts as evidence in
future for the audit work
being
performed.
1. It is a set of procedures to be adopted to conduct the audit more efficiently.
2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time limit for completion of the work.

Objectives of Audit
Programme:
Following are the important
objectives of audit
programme:
1. To provide clear
instructions to the audit
assistants specifying
the nature of work to be
performed and fixing the
time span for
completion of each work.
2. To facilitate
coordination among various
parts of audit work.
3. To ensure uniformity in
the performance of audit work
and to
avoid duplication and
repetition of work.
4. To attain a fair
allocation of work among
audit team.
Objectives of Audit Programme: Following are the important objectives of audit programme:
1.To provide clear instructions to the audit assistants specifying the nature of work to be performed
and fixing the time span for completion of each work.
2.To facilitate coordination among various parts of audit work.
3.To ensure uniformity in the performance of audit work and to avoid duplication and repetition of work.
4.To attain a fair allocation of work among audit team.

To fix responsibility and

accountability of each audit
assistant.
6. To serve as a guide for
planning the audit work in
future.
7. To serve as evidence in
future showing the date of
completion
of audit work, methods or
procedures undertaken,
persons involved
in completion of audit work
etc.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
7.To serve as evidence in future showing the date of completion of audit work, methods or procedures
undertaken, persons involved in completion of audit work etc.

Advantages of an Audit
Programme:
An audit programme provides
the following advantages:
1. Helps in Estimation
and Division of Work: Audit
Programme helps in
estimating the quantum of
audit work in
advance and also helps in
dividing the work among
the audit
assistants based on their
capabilities.
2. Helps in Fixation of
Responsibility: It enables to
fix
responsibility on the audit
assistants by clearly defining
the scope of
work.
3. Helps in Future
Planning: Audit programme
serves as a
basis for planning the audit
work for subsequent year.
4. Serves as a Guide: It
serves as a valuable guide for
the audit
staff in execution of the audit
work for succeeding years
 Advantages of an Audit Programme:
An audit programme provides the following advantages:
1 Helps in Estimation and Division of Work: Audit Programme helps in estimating the quantum
of audit work in advance and also helps in dividing the work among the audit assistants based on
their capabilities.
2.Helps in Fixation of Responsibility: It enables to fix responsibility on the audit assistants by
clearly defining the scope of work.
3. Helps in Future Planning: Audit programme serves as a basis for planning the audit work for
subsequent year.
4.Serves as a Guide: It serves as a valuable guide for the audit staff in execution of the audit work for
succeeding years.

5. Valuable Evidence: It
serves as evidence for the
work done
as initials of those who have
done the particular work are
appended
to it. The auditor can produce
the audit programme as a
proof when
a charge of negligence being
brought upon him.
6. Uniformity: It provides
for uniformity in audit work
as the
same work will be done every
year.
7. Continuity: When an
audit staff goes on leave
others can
continue the work by referring
to the audit programme, hence,
audit
programme provides for
continuity of work.
8. Coordination: It
facilitates coordination and
helps in
supervising the work of the
audit staff.
5. Valuable Evidence: It serves as evidence for the work done as initials of those who have done the
particular work are appended to it. The auditor can produce the audit programme as a proof when a
charge of negligence being brought upon him.
6.Uniformity: It provides for uniformity in audit work as the same work will be done every year.
7.Continuity: When an audit staff goes on leave others can continue the work by referring to the
audit programme, hence, audit programme provides for continuity of work.
8.Coordination: It facilitates coordination and helps in supervising the work of the audit staff.

Disadvantages of an Audit
Programme:
The disadvantages that may be
experienced by conducting
audit as
per predetermined audit
programme are -
1. Mechancial: When audit
work is conducted
mechanically every
year based on the audit
programme, it causes
monotony and
boredom to the auditor and
audit staffs.
 Disadvantages of an Audit Programme:
The disadvantages that may be experienced by conducting audit as per predetermined audit programme are:
1. Mechancial: When audit work is conducted mechanically every year based on the audit
programme, it causes monotony and boredom to the auditor and audit staffs.
2. No Quality in Work: The audit staff will be more interested to complete the work in time rather
than to maintain any standard in the work.
3. Loss of Initiative: Audit staff cannot take their own decisions and they are compelled to comply
with the audit programme. Hence, an efficient audit clerk loses his initiative and interest as he cannot
make any suggestions.
4. Rigidity: A rigid and inflexible audit programme cannot be laid for all types of business. During the
course of audit, new areas to be verified may come to the notice of the audit staff. Unless the audit
programme is revised, such areas may escape from auditing.
5. Shelter for Inefficient Staff: Inefficient audit staffs conceal their mistakes or weakness on the basis of
audit programme. Hence, it provides shelter for inefficient audit staff.
6. Unsuitable: Pre-determined audit programme is not suitable for small business organizations.
AUDIT WORKING PAPERS
The Institute of Chartered Accountants of India insists on the preparation and keeping of adequate working
papers.
According to the Institute of Chartered Accounts of India, “Working papers must include audit programme,
queries, explanations given for the queries, schedules of important items like depreciation, inventories,
confirmation from third parties, certificates issued by the management, banks, etc”
 Working papers provide basic evidence of audit conducted in accordance with standard audit practices.
 They help the auditor in writing the report.
 The quality of audit work performed by the auditor can be judged by the character and contents of
working papers prepared and maintained by the auditor.
Importance of Working Papers
Working papers are an essential part of every audit for effectively planning the audit, providing a record of
the evidence accumulated and the results of the tests, deciding the proper type of audit report, and reviewing
the work of assistants.
 Working papers assist in the planning and performance of the audit.
 Working papers are necessary for audit quality control purposes.
 Working papers assure that the work delegated by the audit partner has been properly completed.
 Working papers provide evidence that an effective audit has been carried out.
 Working papers increase the economy, efficiency, and effectiveness of the audit.
 Working papers contain sufficiently detailed and up-to-date facts which justify the reasonableness of the
auditor’s conclusions.
 Working papers retain a record of matters of continuing significance to future audits.
 The preparation of the working papers is a means to give training to the audit clerks as to how to
summarize the work done by them.
 The working papers enable the auditor to point out to the client the weakness of the operation’s internal
control system and the accountancy system’s inefficiency. Therefore, he may be in a position to advise his
client on how to avoid such pitfalls.
 The working papers enable the auditor to prepare the report to be issued without wasting time.

Contents of Working Papers

Each audit working paper must be headed with the following information:
 The name of the client.
 The period covered by the audit.
 The subject matter.
 The file reference.
 The initials (signature) of the member of staff who prepared the working paper and the date on which it
was prepared.
 In the case of audit papers prepared by client staff, the date the working papers were received, and the
initials of the audit team member who carried out the audit work.
 The initials of the member of staff who reviewed the working papers and the date on which the review
was carried out.
Objectives of audit working papers
1. The working papers serve the auditor both as useful audit tool as well as a permanent record of the audit
work performed.
2. They are useful to the auditor to control the current year’s audit work.
3. They constitute a reliable guidance for planning the future audit assignments.
4. A review of the audit working papers gives an assurance that the audit work is both accurate and complete.
5. The auditors arrange the data properly in the working papers. Hence, the data become more meaningful
and useful for the purpose of the,audit.
6. Working papers are necessary to corroborate the work and the findings of all the audit staff.
7. The chief auditor is assured that the opinion is supported by the findings of their audit staff.
8. The working papers constitute complete and conclusive evidence in future as to the entirety and
completeness of the audit work.
AUDIT NOTE BOOK
During the course of audit, the audit clerk experiences several difficulties. He cannot remember everything
at all time. So, he maintains a book with him in which he makes note of important points and queries, which
he has to refer to the client’s staff or clarify with the chief auditor. Such a book is called Audit Note Book.
It is an essential book used to note important points that shall be included in the Auditor’s report. It is a
complete record of doubts and their clarification. It helps the auditor in his subsequent audits. It is also used
as a guide to the other audit clerks.
To sum up audit note book is nothing but a dairy, maintained by the audit staff for the purpose of recording
certain points which require further clarification, explanation and investigation.
Contents of Audit Note Book
An audit notebook generally consists of the following information:
1. The nature of the business and summary of important documents relating to the constitution of the
business such as Memorandum of Association, Articles of Association or Partnership Deed, etc.
2. A list of the books of accounts maintained.
3. Particulars as to the system of accounts followed and the system of internal check in force.
4. Names of principal officers, their duties and responsibilities.
5. Progress of audit work together with the dates on which the work was undertaken and completed.
6. Extracts from correspondence with different authorities.
7. Audit programme.
8. Allocation of work among different audit staff.
9. All queries which have not been clarified so far.
10. Lists of missing receipts, vouchers, bills, etc.
11. Any special point arising during the course of audit to which the attention of the auditor must be drawn.
12. All mistakes and errors discovered.
13. Points to be incorporated in the audit report.

Advantages of Audit Note Book

Some the advantages of audit note book are given below:
1. Audit note book enables the auditor to record important points, which arise during the course of his audit;
otherwise, he might forget these points.
2. An auditor can produce this book as documentary evidence in a suit filed against him for negligence or
misfeasance.
3. It facilitates the preparation of the audit report.
4. If the assistant in charge is changed before the completion of a particular work, it acts as a guide and
makes the completion of balance work easier.
5. A credit note book makes the work of audit convenient because all the important details about audit can be
recorded in this book and, as such, any change in the staff of the auditor does not disturb or dislocate the
work of audit.
6. It can help in making an assessment of the work of audit clerks.
7. It provides a key to evaluate the efficiency of the audit staff.

Disadvantages of Audit Note Book

There are, however, certain disadvantages of audit note book. They are as follows:
1. Very often, it creates misunderstanding between the client staff and the audit staff.
2. If it is not properly and carefully prepared it cannot be used as evidence against the auditor for negligence.
3. It develops a fault-finding attitude in the minds of the staff of the audit.
4. Audit staff has to depend too much upon the client’s staff for its preparation.