CHAPTER -4
INTERNAL CONTROL
DEFINITION:
According to Spicer and Pegler, “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 “.
INTERNAL CONTROL
Internal control is the whole system of control established by the
management for the proper conduct of various activities of the
organization in order to carry out the business in orderly and in efficient
manner.
Features
1. It is the overall control adopted by the management
2. It comprises of plans, methods and procedures for the effective control
3. It comprises of internal check, internal audit, accounting systems and
administrative control
4. It is established by the management
5. It intended to help the management to run the business efficiently
Objectives
 To ensure that transactions are recorded in proper books of accounts
 To see that all the transactions are carried out only with the specific
sanction and authorization of the management.
 To See that management policies and decisions are properly implemented
 To ensure efficient conduct of business
 To Evaluate the efficiency of performance of the personnel
 To see that access to and use of assets are made only with proper
authorization.
 To safeguard the asset of the organization by preventing frauds, waste
and inefficiency.
 To ensure the periodical verification of assets
Essentials of good Internal control/ basic principles of internal control
 It should be clear and well developed plan of the organization
 There should be competent and trust worthy personnel
 Every transaction should be authorized by an official.
 There should be segregation of duties
 There should be proper system of reporting from lower to top
management.
 There should be well developed and adequate accounting system
 There should be a sound system of recording of accounts
 There should be efficient internal check system
 There should be good audit system
 There should be periodical review of internal control
Advantages of Internal control
A. To the business
 Provide accurate and reliable data to the management
Ensure that policies and procedures are complied with
Promotes operational efficiency
Help to attain organizational goal
To safe guard the assets of the organization
To ensure the reliability of accounting records
B. To the auditors
 Easy framing of audit programme
 Determines the extent to which he can rely on test checks
LIMITATIONS OF INTERNAL CONTROL
 If internal controls are not cost effective, there is no meaning in adopting them
 Not free from human errors
 Frauds committed through collusion between the persons cannot be avoided
 Do not keep pace with the changes in conditions
 Management itself may override some of the internal controls
INTERNAL CHECK
According to F.R.M. De Paula, “Internal check means practically a
continuous internal audit carried on by the staff itself, by means of which
the work of each individual is independently checked by the other
members of the staff”
Objectives of Internal Check
• Proper division of work
• Minimisation of errors and frauds
• Early detection of errors and frauds
• Ensuring the reliability of accounts
• Early preparation of final accounts
• Simplification of external auditors work
ESSENTIALS OF GOOD SYSTEM OF INTERNAL CHECK
 Simple, easily workable and effective
 Should not be too expensive
 Must be carefully devised and properly regulated
 Employees should be carefully selected and properly trained
 Rights, duties and liabilities should be clearly defined
 Proper division of responsibility of work among the members of the staff
 Division of work should be based on their qualifications, area of
specialisation, experience and capabilities
 Clear cut instructions about each job should be given in writing
no overlapping or duplication of work
No employee should be allowed to remain on a particular job for long
All incoming letters should be opened by a responsible official
Debtors and creditors should be requested to send statements at certain intervals
All cash payments should be made by cheques as far as possible
Cash and bank balances should be verified frequently
No deviations should be allowed from the established procedures unless it is
formally sanctioned by the top official
There should be strict supervision
The system of internal check should be reviewed from time to time
ADVANTAGES OF INTERNAL CHECK
• TO THE CONCERN OR BUSINESS:
1. Proper division of work
2. Fixation of responsibility
3. Greater efficiency of staff
4. Increased earnings or profits
5. Early detection of errors and frauds
6. Prevention of errors and frauds
7. Early and easy preparation of final accounts
8. Truth and accuracy of the accounts
• TO THE OWNERS OF THE BUSINESS:
1. Rely on the genuineness and accuracy of accounts
2. Increased earnings or dividends
• TO THE AUDITOR:
1. Need not have detailed checking of each and every transaction
DISADVANTAGES OF INTERNAL CHECK
 Suitable only for big concerns
 Sacrifice of quality for quickness
 Complacency among high officials
 Chaos and disorder in the working of the concern
 Useful only when there is no collusion between the employees
 Risky for the auditor
1. Internal check regarding Cash sales
 Sales at the counter
 Sales by the travelling salesmen
 Postal sales
2. Internal check regarding cash Purchases
3. Internal check regarding Wages
 General guidelines
 Maintenance of wage record
 Preparation of wage sheet
 Payment of wages
4. Internal check regarding Stores
 General guidelines
 Receipt of stores
 Recording of stores