1.0 INTRODUCTION In this note, you shall learn the relevance
of internal control and internal control system in an organization. The
objectives, essential features and components of internal control will be
considered. You shall also be able to distinguish between internal control and internal
check, and explain the relationship, differences and areas of cooperation
between the internal and
external auditors. Before the end of the note, you
shall also be able to highlight internal control in specific areas of a
business and its limitations.
2.0 OBJECTIVES At the end of this note, you should be able
to:
· define internal control and internal control system
· list the objectives and describe the essential features of
internal control
· identify the components of internal control
· distinguish between internal control and internal check
· describe internal control in specific areas of business
· state the limitations of internal control.
3.0 MAIN CONTENT
3.1 Internal Control Internal control system means the whole
system of controls, financial and otherwise, established by the management in
order to carry on the business of the enterprise in an orderly and efficient
manner, ensure adherence to management policies, safeguard the assets and
secure, as far as possible, the completeness and accuracy of the records. Also,
the American Institute of Certified Public Accountants defines internal control
thus.
Internal control comprises the plan of an organization and all of
the coordinated methods and measures adopted within a business to safeguard
assets, check accuracy and reliability of its accounting data, promote
operational efficiency and encourage adherence to the prescribed managerial
policies. The individual components of an internal control system are known as “controls”
or “internal control”.
3.1.1 Objectives of Internal Control The objectives of internal control are as
follows.
(a) To ensure adherence to management policies.
(b) To safeguard the
company’s assets.
(c) To ensure accurate and reliable records.
At an early
stage of his work, the external auditor will have to decide the extent to which
he wishes to rely on the internal controls of the enterprise. As the audit
proceeds, that decision will be subject to review, and depending on the result
of his examination, he may decide whether or not to place reliance (less or
much) on these controls.
3.1.2 Essential Features of Internal
Control There are three
features, namely:
(a) authorisation (the initiation of a contractual
obligations).
(b) custody (the handling of assets involved in the
transactions).
(c) recording (the creation of documentary evidence of the transactions
and its entry in the accounting records).
The essence of internal control lies
in the separation of the three functions mentioned above, which represent the
objectives of control in any departmental context.
3.1.3 Components of Internal Control
The basic components of internal controls are:
(a) internal check (segregation).
(b) internal audit.
(c) physical control.
3.2 Internal Check This aspect of internal control is
exclusively concerned with the prevention and early detection of omissions,
errors and fraud. It involves the arrangement of bookkeeping and other clerical
duties in such a way to ensure that:
(a) no single task is
executed from the beginning to the end by one person only.
(b) the work of each clerk
engaged upon a task is subjected to an independent check in the course of
another’s duties. For example, in a construction firm that employs staff
members who are paid by cash (based on the number of hours worked for), the wages
section may use a system which involves the following segregation of duties:
(i) Collection and
sorting of time cards;
(ii) Calculation
and listing of standard hours and overtime hours worked for by reference to the
time cards;
(iii) Calculation
of gross pay by reference to records supplied by the personnel department;
(iv) Production of
payroll on accounting machine, that is, entry of gross pay, deductions,
calculation of net pay, cumulative cast and cross-cast of payroll;
(v) Double check of
cast and cross-cast of payroll;
(vi) Submission of
payroll to a signatory in order to obtain wages cheque;
(vii) Visit to bank
to obtain cash for wages;
(viii) Insertion of
cash into envelopes by reference to duplicate pay list;
(ix) Payment of
wages against signed receipt from each employee;
(x) Returning
signed payroll and unclaimed wages to the cash department for special action.
3.3 Internal Audit In the previous note (Note 2), you learnt
the definition of internal audit as an independent appraisal activity within an
organization for the review of accounting, financial and other controls as a
basis of service to management. And that it is the managerial control which functions
by measuring the effectiveness of other controls. It was also pointed out that
the internal auditor is an employee of the organization and is responsible to
its management.
You are also aware that the internal auditor requires a degree of
independence to function, but because he is an employee of the organization
and, invariably, takes directions from the management, his independence may be
impaired. The duties and responsibilities imposed upon the internal audit
deserve special attention. The effective operation of a business depends on the
effectiveness of the internal audit.
Internal audit is one of the features of management control, and
therefore, aids management to achieve efficient and effective operation of the
business. Internal audit note is responsible for designing internal controls
and procedures, and providing accurate information to the management for the
day-to-day operations of the business.
3.3.1 Relationship between the Internal and
External Auditors The relationship
subsisting between the internal and external auditors is based on the fact that
on accounting matters, they operate largely in the same field and have a common
interest in satisfying themselves that:
(a) there is an effective system of internal check to prevent or
detect errors and frauds, and that the system is operating correctly;
(b) there is an adequate
accounting system to provide the information necessary to prepare a true and
fair financial statement.
3.3.2 Differences between the Internal and
External Auditors We can look at the
differences from the domain of scope, approach and responsibility.
3.3.3 Cooperation between the Internal and
External Auditors Without
cooperation, the work of both the internal and external auditors could be
duplicated largely because their procedures are the same. Because of the wider
experience gained in the public practice, the external auditor may be of
assistance in an advisory capacity in connection with the installation and
subsequent operation of internal audit in the company.
He (external auditor) may
also derive some benefits from the internal auditor’s intimate knowledge of the
business, particularly, in connection with stock-in-trade, the physical
existence of fixed assets, depreciation charges, the ascertainment of
liabilities and the risk of fraud or misappropriation. Specific areas of
cooperation may be as follows.
(a) The independent auditor may be able to rely, to a larger
extent, on the internal auditor in determining whether the system of the internal
check is operating satisfactorily and in assessing the general reliability of
the accounting records.
(b) The audit programmes of the internal auditor may include, by agreement,
the work which has the effect of giving direct assistance to the external
auditor by participating during the accounting period in matters such as cash
counts and visits to branches made either by the internal auditor alone or
jointly with the external auditor.
(c) The internal auditor may arrange his audit programmes at the
end of the accounting period so that assistance is given to the independent
auditor in connection with matters such as the confirmation of customer’s
account, verification of assets such as stock-in-trade and the preparation of
audit working schedules required by the independent auditor for his records.
3.4 Internal Control in Specific areas of a
Business This section is
divided up into the areas of activity usually found in a business. At the
beginning of each area are the stated the objectives of internal control in the
area and then some measures through which the objectives will be achieved.
3.4.1 Internal Control Generally Objective To carry on the business in an orderly and
efficient manner, to ensure adherence to management policies, safeguard its
assets, and secure the accuracy and reliability of records.
Measures (i) An appropriate and integrated system of accounts and records;
(ii) Internal controls over those accounts and records;
(iii) Financial supervision and control by management, including budgetary
control, management accounting reports, and interim accounts;
(iv) Safeguarding and if necessary, duplicating records;
(v) Engaging, training, allocating to specific duty staff members
who are capable of fulfilling their responsibilities. Rotation of duties and
cover for absences.
3.4.2 Cash and Cheques Received by Post Objectives
· To ensure that all cash and cheques received by post are accounted
for and accurately recorded in the books;
· To ensure such receipts are promptly and intactly deposited in the
bank.
Measures
(i) Prevent
interception of mail between receipt and opening;
(ii) Appointment of
an official to be responsible for the opening of the post;
(iii) Two persons
to be present at the opening of the post;
(iv) All cheques
and other negotiable instruments to be immediately given a restrictive crossing
e.g. account payee only, not negotiable;
(v) Immediate entry
of the details of the receipts (date, payer, amount, cash, cheque, or other) in
a ‘rough cash book’ or post-list of money received. The list should be signed by
both parties present;
(vi) Regular
independent comparison of the post list with banking records. The tests should
be of total, detail and dating to detect teeming and lading at a later stage in
the processing.
3.4.3 Cash Sales and Collections Objectives
· To ensure that all cash, to which the enterprise is entitled, is received;
· To ensure that all such cash is properly accounted for and entered
in the records;
· To ensure that all such cash is promptly and instantly deposited.
Measures
(i) Prescribing and limiting the number of persons who are authorized
to receive cash e.g. sales assistants, cashiers, etc;
(ii) Establishing a means of evidencing cash receipts e.g. pre
numbered duplicate receipt forms, cash registers with sealed till rolls. The
duplicate receipt form books should be securely held and issue controlled;
(iii) Ensuring that customers are aware that they must receive a receipt
form or ensuring that the amount stated in the cash register is clearly visible
to the customer;
(iv) Appointment of officers with responsibility for emptying cash
registers at prescribed intervals, and agreeing the amount present with till
roll totals or internal registers. Such collections should be evidenced in
writing and be initialed by the assistant and the supervisor;
(v) Immediate and intact banking. Payments out should be from funds
drawn from the bank on an imprest system;
(vi) Investigation of shorts and overs;
(vii) Independent comparison of agreed till roll totals with
subsequent banking records;
(viii) Persons handling cash should not have access to other cash
funds or to bought or sales ledger records;
(ix) Rotation of duties and cover for holidays (which should be compulsory)
and sickness;
(x) Collections by roundsmen and travellers should be banked
intact daily. There should be independent comparison of the amounts banked with
records (e.g. duplicate receipt books) of the roundsmen and salesmen;
(xi) Wherever possible, roundsmen should have a controlled issue
of merchandise with a check, on their return, that they have cash or goods to
the value of the controlled issue on the lines of an imprest system.
3.4.4 Payments into Bank Objectives
· To ensure that all cash and cheques received are banked intact;
· To ensure that all cash and cheques received are banked without delay
at prescribed intervals, preferably daily;
· To ensure that all cash and cheques received are accounted for and
recorded accurately.
Measures
(i) Cash and cheques should be banked intact;
(ii) Cash and cheques should be banked without delay preferably daily;
(iii) The bank paying-in slip should be prepared by an official
with no access to cash collection points, bought or sales ledgers;
(iv) Bankings should be made with security in mind, for example,
for large cash sums, security guards should be used;
(v) There should be independent comparison of paying-in slips with
collection records, post lists and sales ledger records.
3.4.5 Cash Balances Objectives
· To prevent misappropriation of cash balances;
· To prevent unauthorized cash payments.
Measures
(i) Establishment of cash floats of specified amounts and
locations;
(ii) Appointment of officials responsible for each cash balance;
(iii) Arrangement of security measures including use of safes and restriction
of access;
(iv) Use of imprest system with rules on reimbursement only
against authorized vouchers;
(v) Strict rules on the authorisation of cash payments;
(vi) Independent cash counts on a regular and a surprise basis;
(vii) Insurance arrangements e.g. for cash balances;
(viii) Special rules for I.O.Us. Preferably these should not be permitted.
3.4.6 Bank Balances Objectives
· To prevent misappropriation of bank balances;
· To prevent teeming and lading. Measures
(i) Reconciliation
should be prepared at prescribed frequency;
(ii) They should be
performed by independent personnel;
(iii) Arrangements
should be made for bank statements to be sent direct to the person responsible
for the reconciliation;
(iv) Work on
reconciliations should include the following:
· A comparison of each debit and credit in the cash book with the corresponding
entries in the bank statements;
· A comparison of returned cheques with the cash book entries noting
dates, payees and amounts;
· A test of the detailed paying-in slips with the cash book;
· The dates of credits in the bank statements should be traced through
to the next period and their validity verified;
· Any unusual items, for example, dishonoured cheques should be investigated.
(v) The balances at the bank should be independently verified with
the bank at intervals.
3.4.7 Cheque Payments Objective To prevent unauthorized payments being made
from bank accounts. Measures (
i) Control over custody and issue of unused cheque books. A register
should be kept if necessary;
(ii) Appointment of an official to be responsible for the
preparation of cheques;
(iii) Rules should be established for the presentation of
supporting documents before cheques can be made out. Such supporting documents
may include orders, invoices, etc;
(iv) All such documents should be stamped ‘paid by cheque no. …’ with
date;
(v) Establishment of who can sign cheques. All cheques should be signed
by at least two persons, with no person being permitted to sign if he is a
payee;
(vi) No cheques should be made out to bearer except for the collection
of wages or reimbursement of cash funds;
(vii) All cheques should be restrictively crossed;
(viii) The signing of blank cheque must be prohibited;
(ix) Special safeguards where cheques are signed mechanically or have
pre-printed signatures. Such signings are often made for dividend payments,
salary cheques and other reasons;
(x) Rules to ensure prompt despatch and to prevent interception or
misappropriation;
(xi) Measures to ensure cash discounts are obtained;
(xii) Special rules for authorising and checking direct debits and
standing orders;
(xiii) Separation of duties: custody, recording and initiation of
cheque payments: cash records and other areas e.g. debtors and creditors.
3.4.8 Wages and Salaries Objectives
· To ensure that wages and salaries are paid only to actual employees
at authorized rates of pay; · To ensure that all
wages and salaries are computed in accordance with records of work performed
whether in respect of time, output, sales made or other criteria;
· To ensure that payrolls are correctly calculated;
· To ensure that payments are made only to the correct employees;
· To ensure that payroll deductions are correctly accounted for and paid
over to the appropriate third parties;
· To ensure that all transactions are correctly recorded in the
books of account.
Measures
(i) There should be separate records kept for each employee. The records
should contain such matters as date of engagement, age, next of kin, agreed
deductions, skills, department, and specimen signature. Ideally, these records
should be maintained by a separate personnel department;
(ii) Procedures for and specified officials responsible for, engagements,
retirements, dismissals, fixing and changing rates of pay. Procedures should be
laid down for notification of these matters to the personnel and wage roll
preparation departments;
(iii) Time records should be kept, preferably by means of
supervised clock card recording. These should be approved and approval acknowledged.
All overtime should be authorized;
(iv) Output or piecework records should be properly controlled and
authorized. Procedures should exist for reconciling output or piecework records
with production records;
(v) The payroll should be prepared by personnel unconnected with other
wage duties. Special procedures should exist for dealing with advances, leave
grant, layoff pay, luncheon vouchers, new employees, employees leaving,
sickness and other absences and bonuses;
(vi) The payroll should be checked by separate personnel. All work
on the preparation and checking of payroll should be initialled. All such work
should be supervised and the payroll scrutinized and approved by a senior
official;
(vii) The net amount due to be paid out in cash should be drawn
after a coin analysis. Tight security should be imposed on the security of
cash, both on collection from the bank and at all times up to the receipt of
pay envelopes by the workforce. Ideally, collection of cash from the bank
should be by a security organization;
(viii) Wage envelopes should be made up by personnel independent
of the wage roll preparation team;
(ix) Specified times should be laid down for distribution of wage packets.
These should either be acknowledged by the recipients or distribution should be
made in the presence of (but not by) foremen or others capable of identifying
employees;
(x) Surprise attendance at payouts should be made at intervals by internal
audit or by a senior official;
(xi) Unclaimed wages should be subject to special procedures.
These should include a record to be maintained of unclaimed wages, safe custody
of such pay packets, a requirement for investigation, subsequent payout only
after proof of entitlement, breaking down and rebanking after a specified
period of time;
(xii) Payments by cheque and credit transfer should be subject to special
procedures. These could include maintenance of a separate bank account with
regular reconciliation;
(xiii) Deductions such as PAYE, national health insurance, pension
contributions, save as you earn, and union dues should be subject to prompt
payment over to the institutions concerned. Control totals subject to frequent
review should be kept. Independent comparisons of such totals with records such
as tax deduction cards should be performed regularly; (
(xiv) Regular independent comparisons should be made between personnel
records and wages records;
(xv) Regular independent comparisons of payrolls at different
dates;
(xvi) Regular independent comparisons of wages paid with budgets and
investigation of variances;
(xvii) Surprise investigation of wage records and procedures by
internal audit or senior officials;
(xviii) An independent official should be appointed to be
responsible for settling queries;
(xix) Wage records should conform to the requirements of Statutory
Sick Pay. Note that most firms now credit employees’ bank accounts through the banking
system – e-payment system.
3.4.9 Purchases and Trade Creditors Objectives
· To ensure that goods and services are only ordered in the quantity,
of the quality, and at the best terms available after appropriate requisition
and approval;
· To ensure that goods and services received are inspected and only acceptable
items are accepted;
· To ensure that all invoices are checked against authorized orders and
receipt of the subject matter in good condition;
· To ensure that all goods and services invoiced are properly recorded
in the books.
Measures
(i) There should be procedures for the requisitioning of goods and
services only by specified personnel on specified forms with space for
acknowledgement of performance;
(ii) Order forms should be pre-numbered and kept in safe custody. Issue
of bank order form books should be controlled and recorded;
(iii) Order procedures should include requirements for obtaining tenders,
estimates or competitive bids;
(iv) Sequence checks of order forms should be performed regularly by
a senior official and missing items investigated;
(v) All goods received should be recorded on goods received notes (preferably
pre-numbered) or in a special book;
(vi) All goods should be inspected for condition and agreement
with order and counted on receipt. The inspection should be acknowledged.
Procedures for dealing with rejected goods or services should include the
creation of debit notes (prenumbered) with subsequent sequence checks and
follow up of receipt of suppliers’ credit notes;
(vii) At intervals, a listing of unfulfilled orders should be made
and investigated;
(viii) Invoices should be checked for arithmetical accuracy,
pricing, correct treatment of VAT and trade discount, and agreement with order
and goods-in records. These checks should be acknowledged by the performer
preferably on spaces marked by a rubber stamp on the invoices;
(ix) Invoices should have consecutive numbers put on them and batches
should be pre-listed;
(x) Totals of entries in the invoice register or daybook should be
regularly checked with the pre-lists;
(xi) Responsibility for purchase ledger entries should be vested
in personnel separate from personnel responsible for ordering, receipt of goods
and the invoice register;
(xii) The purchase ledger should be subject to frequent
reconciliations in total by or be checked by an independent senior official;
(xiii) Ledger account balances should be regularly compared with suppliers’
statements of account;
(xiv) All goods and service procurement should be controlled by budgetary
techniques. Orders should only be placed that are within budget limits. There
should be frequent comparisons of actual purchases with budgets and investigation
into variances;
(xv) Cut off procedures at the year end are essential;
(xvi) A proper coding system is required for purchase of goods and
services so that the correct nominal accounts are debited.
3.4.10 Sales and Debtors Objectives
· To ensure that all customers orders are promptly executed;
· To ensure that sales on credit are made only to bona fide good credit
risks;
· To ensure that all sales on credit are invoiced, that authorized prices
are charged and that before issue all invoices are completed and checked as
regards price, trade discounts and VAT; · To ensure that all
invoices raised are entered in the books;
· To ensure that all customers’ claims are fully investigated before
credit notes are issued;
· To ensure that every effort is made to collect all debts;
· To ensure that no unauthorized credits are made to debtors accounts.
Measures
(i) Incoming orders should be recorded, and if necessary, acknowledged,
on pre-numbered forms. Orders should be matched with invoices and lists
prepared at intervals of outstanding orders for management action. Sequence
checks should be made regularly by a senior official;
(ii) Credit control. There should be procedures laid down for verifying
the credit worthiness of all persons or institutions requesting goods on
credit. For existing customers, credit worthiness data should be kept
up-to-date and checks made that outstanding balances and a new sale do not
cause the pre-set credit limit to be exceeded. For new customers, investigative
techniques should be applied including enquiry of trade protection
organizations, credit rating agencies, referees, the company’s file with the
registrar of companies, etc. A credit limit should be established. This may be
fixed at two levels- a higher one such that further sales are not made and a
lower one such that management are informed- and a judgement made on granting
credit;
(iii) Selling prices should be prescribed. Policies should be laid
down on credit terms, trade and cash discounts, and special prices;
(iv) Despatch of goods should only be on properly evidenced authority.
Goods out should be recorded either in a register or using pre-numbered
despatch notes. Unissued blocks of despatch notes should be safeguarded and
issue recorded. Sequence checks of dispatch notes should be made regularly by a
senior official. Where appropriate, acknowledgement of receipt of goods should be
made by customers on copy despatch notes;
(v) Invoicing should be carried out by a separate department or by
sales staff. Invoices should be pre-numbered and the custody and issue of
unused invoice blocks controlled and recorded. Sequence checks should be
regularly made by a senior official and missing or spoiled invoices
investigated;
(vi) All invoices should be independently checked for agreement with
customer’s order, with goods despatched record, for pricing, discounts, VAT and
other details. All actions should be acknowledged by signature or initials;
(vii) Accounting for sales and debtors should be segregated by employing
separate staff for cash, invoice register, sales ledger entries and statement
preparation;
(viii) Sales invoices should be pre-listed before entry into the
invoice register or daybook and the pre-list total independently compared with
the total of the register;
(ix) Customer claims should be recorded and investigated. Similar controls
(e.g. pre-numbering) should be applied to credit notes. At the year end,
uncleared claims should be carefully investigated and assessed. All credit
notes should be subject to acknowledged approval by a senior official;
(x) A control account should be regularly and independently prepared;
(xi) Debtors’ statements should be prepared by personnel separate from
the sales ledger personnel. Posting should be subject to safeguards so that no
statements are misappropriated before posting;
(xii) Procedures must exist for identifying and chasing slow
payers. Overdue balances should be brought to the attention of senior management
for legal or other action to be taken;
(xiii) All balances must be reviewed regularly by an independent official
to identify and investigate overdue accounts, debtors paying by instalments or
round sums, and accounts where payments do not match invoices;
(xiv) Bad debts should only be written off after due investigation
and acknowledged authorisation by senior management;
(xv) At the year end, an aged analysis of debtors should be
prepared to evaluate the need for a doubtful debt provision;
(xvi) Also at the year end, cut off procedure will be required.
Particular attention will be paid to orders despatched but not invoiced.
3.4.11 Stock and Work-in-Progress Objective To ensure that stock is adequately
protected against loss or misuse.
Measures
(i) Separate arrangements for each type of stock e.g. raw
materials, components, work-in-progress, finished goods, consumable stores;
(ii) Control over the receipt of goods (see under purchases);
(iii) Stock should be
stored under conditions which deter deterioration due to physical causes e.g.
heat, cold, damp, microbe action etc. Special arrangement should be made for
stock which is dangerous or classified secret;
(iv) Stock should be safeguarded against loss by theft by
appropriate physical controls including restriction of access;
(v) Where appropriate, stock records should be maintained. Entries
should be made by personnel independent of staff responsible for purchasing and
custody of goods;
(vi) Documentation should be controlled by the use of controlled
prenumbered forms with regular sequence checks;
(vii) Work-in-progress and finished goods stocks may be subject to
recording by value including the charging of material, labour and overhead
costs. Control over the latter items can be exercised by the use of control
accounts and reconciliation with payroll or records of machine hours;
(viii) Stock records should be continuously compared with actual stocks
held by independent officials. All differences should be corrected and causes
investigated;
(ix) Ideally, all stock items should be subject to established
maximum and minimum stock levels with re-order levels;
(x) Special arrangements should be applied to returnable
containers, other’s stock on our premises, our stock on other’s premises, scrap
and waste;
(xi) Whether or not a continuous inventory is maintained, there should
at least be an annual stock take. Procedures should be prescribed for this with
emphasis on identifying damaged, slow moving, and obsolete stock and on cut off
procedures.
3.4.12 Fixed Assets Objectives · To ensure that fixed assets are only acquired with proper authority;
· To ensure that fixed assets are properly maintained and used only in
the business;
· To ensure that fixed assets are properly accounted for and recorded;
· To ensure that disposals are properly authorized and that proceeds
of disposals are accounted for and recorded.
Measures
(i) Capital expenditure should be subject to authorisation
procedures which in all cases should be evidenced. In appropriate cases (e.g. new
products or production methods), capital investment appraisal techniques should
be applied to acquisitions. It may be desirable in such cases for proposed
expenditure to be reviewed by a special committee and for board authority to be
required. Other capital expenditures (e.g. replacement of equipment) may be
subject to requests on specified forms with board approval.
In yet other cases (e.g.
motor vehicles), the board may lay down overall policy and detailed approval
may be given by a designated senior official (e.g. transport manager) subject
to review by or reports to the board. In other cases (e.g. routine replacement
or update of equipment) the expenditure may be subject to budget limits with
actual expenditure approved by a senior official after review that the proposed
expenditure is within the budget;
(ii) All capital
expenditures should be monitored by a senior official (e.g. chief accountant)
with approvals; and any excess expenditure investigated and approval sought;
(iii) Allocation of expenditure between capital and revenue should
be approved;
(iv) Adequate recording of fixed assets should be made with
detailed breakdowns as necessary. In many cases (e.g. for plant, vehicles or
buildings) detailed fixed assets registers should be maintained;
(v) Where registers are maintained, frequent and regular review of
the record with actual assets should be made by senior independent officials.
Where necessary (e.g. land and buildings), this should include a check of
documents of title. In all cases, condition and use should be checked;
(vi) Disposals whether by scrapping, sale, or trade-in should be subject
to authorisation procedures. Receipt of and assessment of 40 reasonableness of proceeds should be monitored by a senior official
(e.g. chief accountant);
(vii) Arrangements to see that fixed assets are properly
maintained by regular inspection and reporting of location, operation and condition.
This can be combined with the physical verification of the asset registers;
(viii) Depreciation policy should be laid down.
3.5 Limitations of Internal Control Internal controls are essential features of
any organization that is run efficiently. However, it is important to realise
(especially for an auditor) that internal controls have inherent limitations
which include:
· a requirement that the cost of an internal control is not disproportionate
to the potential loss which may result from its absence;
· internal controls tend to be directed at routine transactions. The
one-off or unusual transaction tends not to be the subject of internal control;
· potential human error caused by stress of workload, alcohol, carelessness,
distraction, mistakes of judgment, annoyance, and the misunderstanding of
instructions;
· the possibility of circumvention of controls either alone or through
collusion with parties outside or inside the entity;
· abuse of responsibility;
· management override of controls;
· fraud;
· changes in environment making controls inadequate;
· human cleverness – however secure the computer code designed to
prevent access, there is always some hacker who gets in. Auditors must always
perform some substantive tests of material items as well as relying on internal
controls. The inherent limitations of internal control are the reason.
4.0 CONCLUSION
Having studied this note you should be able draw a conclusion
that, although internal controls are essential features of any organization
that is operated efficiently, they (internal controls) have inherent
limitations.
5.0 SUMMARY
Internal control is aimed at:
· ensuring
adherence to management policies;
· safeguarding
the organization’s assets;
· ensuring
accurate and reliable methods.
· internal
check, internal audit and physical control are the basic
components of
internal control.
· There
are relationships, differences and cooperation between the
internal and external
auditors.
· Internal
control can be applied in specific areas of a business.
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