Internal Control System free essay sample

Segregation of duties reduces the risk of intentional manipulation or error and increases the element of checking. P hysical control requires access to assets is limited to authorised personnel. Such control include locks, safe and entry codes. A uthorisation and approval: All transactions should be authorised or approved by an appropriate responsible person. The limits for these authorisations should be specified. M anagement controls are exercised by management outside the day to day routine of the system. Overall supervisory control Review of management accounts and comparison within budgets Internal audit function Special review procedure S upervisory control: Any system of internal control should include the supervision by responsible officials of day to day transactions and recording thereof. O rganisation as a control: The delegation of authority and responsibility should be clearly specified along with identifying the lines of reporting for all aspects of the enterprise’s operations, including the controls. A rithmetical and accounting control: All transactions should be recorded correctly and should be processed accurately through correct authorised persons. We will write a custom essay sample on Internal Control System or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page P ersonnel controls: Personnel should have appropriate skills to perform their responsibilities. Personnel’s qualifications, selection and training should have control with proper guidance. Internal control systems A range of internal controls is internal control system. A company will select internal controls from the SPAM SOAP. Which control it selects depends on the particular circumstances of the company. Internal check Internal check is regarded as those checks on the day to day transaction that operate continuously as part of the routine system, whereby the work of one erson is proved independently of or is complementary to, the work of another. Arithmetical internal checks include pre-lists, post-lists and control totals. Pre-list is a list that is drawn up before any processing takes place. Post-list is a list that is drawn up during or after processing Control total is a total of any sort used for control purposes by comparing it with another total that ought to be th e same. - Aims of internal checks * Segregation of tasks so that for particular action particular person can be responsible. Create and preserve the records that act as confirmation of physical facts and accounting entries. * Break down routine procedures into steps or stages for continuous flow of work and avoidance of bottleneck * Reduce possibility of fraud and error as that focus prevention of error before the reality. - CHARACTERISTICS OF A GOOD INTERNAL CONTROL SYSTEM 1. A clearly defined organisation structure i. Appropriate division and subdivisions ii. Clear lines of responsibility iii. Co-ordination of the activities 2. Adequate internal checks v. Segregation of tasks so that for particular action particular person can be held responsible. v. Proof measures such as control totals, pre-lists etc 3. Acknowledgement of work done (by means of signatures, stamps etc. ) 4. Protective devices for physical security (cctv, security guard etc) 5. Formal documents should acknowledge the transfer of responsibility for goods. (goods received note, requisition orders etc. ) 6. Pre-review: payments or orders need to be checked before finalised. 7. A clearly devised system for authorising transactions within specified limit. 8. Post-review (purchased ledgers can be reconciled with the monthly statement of the suppliers) 9. Funds and property of the company should be kept under proper custody. (Revenue , expenditure and assets should be under the authorised persons) 10. Personnel should have the capabilities and qualifications necessary to carry out their responsibilities properly. 11. An internal audit department for internal control system. - LIMITATION ON THE EFFECTIVENESS OF INTERNAL CONTROLS * Authorisation power can be abused by the person who is entrusted. Management can often override the controls they have set up themselves. * The cost of an internal control may be more than the cost of potential loss. * The potential for human errors due to carelessness, distraction, mistakes, or misunderstanding of instructions. - Internal audit An internal audit is an independent appraisal function established within an organisation to examine and evaluate its activities as a service to the organisation. Types of audit Internal audit is a management control, as it is a tool used to ensure that other internal controls are working satisfactorily. An internal audit department may be asked by management to look into any aspect of the organisation. Five different types are: 1. Operational audit (management/efficiency/value for money audit) a. Monitor management performance at every levels b. Monitor the fulfilment of optimal functioning according to predetermined criteria. 2. Systems audit c. Based on testing and evaluation of internal controls in order to ensure that resources are being managed effectively and information provided accurately. i. Compliance tests seek evidence that the internal controls are being applied as prescribed. i. Substantive test is designed to discover errors and omissions. 3. Transactions audit 4. Social audit 5. Management investigations. - The external auditor An external audit is an independent examination of, and expression of opinion on the financial statement of an enterprise. External auditors are generally firms of chartered or certified accountants. They summarise their conclusions on the com pany’s financial statements by issuing an audit report, addressed to the shareholders. The report must state whether, in the auditors opinion: * The balance sheet gives a true and fair view of the state of affairs of the company at the end of the financial year. * The income statement gives a true and fair view of the profit or loss of the company of the financial year. * The financial statements have been properly prepared in accordance with the Companies Act 2006 True and fair means reasonably accurate and free from bias or distortion. - Difference between internal and external auditors | Internal auditing| External auditing| Role| To advise management on whether the organisation has sound systems of internal controls or protect the organisation against loss. | To provide an opinion to the shareholders on whether the financial statements give true and fair view| Legal basis| Generally not a legal requirement. | Legal requirement for large companies, public companies and many public bodies| Scope of work| Determined by management. Covers all areas of the organisation, operational as well as financial. | Determined by the auditor in order to carry out his statutory duty to report. Approach| Assess risksEvaluate systems of controls. Test operation of systems. Make recommendations for improvements| Increasingly risk based. Test underlying transactions that form the basis of the financial statements. | Responsibility| To advise and make recommendations on internal control and corporate governance. | To form an opinion on whether the financial statements give a true and fair view. | Appointment| Internal audito rs are employees of the organisation. | External auditors are appointed by the shareholders. |