Internal Control can be understood as a system developed, implemented and maintained by the company’s management, in order to ensure the achievement of objectives concerning:
- Effectiveness and efficiency of operations,
- Protecting assets,
- Prevention and detection of frauds and errors,
- Accuracy and completeness of financial reporting,
- Adherence to relevant laws.
It comprises of five elements, which are interconnected to each other and apply to all firms, but their implementation depends on the size of the firm. The elements are control environment, risk assessment, control activities, information and communication and monitoring.
Objectives of Internal Control
- Examining whether the transactions are executed as per the management’s authorization.
- Checking prompt recording of transactions, in correct amount and account and that too in the accounting period, to which it belongs.
- Ascertaining that assets are protected from unauthorized access and use.
- Comparing recorded assets with the existing ones, at various time intervals and taking actions in case differences are discovered.
The most important part of the internal control system is its review, for which the auditor can use any of the methods: Narrative Records, Checklist, Questionnaire, and Flowchart.
Internal audit is defined as an unbiased, rational assurance and consulting function, developed by the management, to keep a check on the activities of the organization. It involves regular and critical analysis of the functions of an organization, for the purpose of recommending improvements. It is aimed at assisting members of the firm in discharging their responsibilities in an effective manner.
Internal Audit Process
The task is performed by the internal auditor, who is appointed by the company’s management. He/she reports the management regarding the analysis, appraisal, recommendation and all relevant information relating to the activities under study.
Objectives of Internal Audit
- To check the accuracy and authenticity of the accounting records, which are reported to those charged with governance.
- To identify whether the standard accounting practices, which are deemed to be pursued by the entity, are complied with or not.
- To ensure detection and prevention of fraud.
- To examine that there is an appropriate authority for the procurement and disposal of assets.
- To verify that the liabilities are incurred only for business causes and not for any other purpose.
- To review the activities of the internal control system, so as to report management regarding deviations and non-compliances.