AUDIT INTERNAL CONTROL SYSTEM

INTERNAL CONTROL SYSTEM

Introduction meaning and relevance of internal control

The responsibility for the prevention, the detection of irregularities and frauds rest with the management who may obtain reasonable assurance; that the responsibility would be discharged by instituting an adequate system of internal control. The auditor's duties do not require him specifically to search for fraud unless required by status or the specific term of his engagement.

Knowledge of the clients systems and controls is an important aspect in determining the appropriate audit strategy. In a large enterprise, the need for sound internal control is not desirable, but very necessary. In a small business direct intervention by the proprietors may prevent or detect errors. In a large business the prevention of errors and frauds is of paramount important. If internal control is sound, it is known that the accounting record will be reliable and accurate.

All organizations whether profit oriented or not operate within conditions of resources constraints. As a result, various steps are taken and procedures established to ensure that the uses of these resources are maximizing in achieving organizational goals.

Primary among the steps taken is the setting up of a structure within which an orderly operation can take place. The organizational structure often depicted in charts specifies the levels of authority communication channels and the roles and responsibilities of officers throughout the organization. Substructures are also use for the major sections These sections include -the sales, purchases, production marketing, engineering and accounting sections to mention a few. Apart from the problem of scarce resources, organizations run a high risk of fraud and errors. Steps are required therefore to minimize this risk by establishing operating rules and regulations.

Internal controls are those procedures, rules and regulations which are set tip be organizations faced with the problem of limited resources in order to ensure that the use of these resources are maximized and that the potential risk of intentional and, unintentional irregularities are reduced to a barest minimum. -

Definition

Internal control system is defined in the auditing standard and guidelines approved by the International Association of Certified Accountants. The Institute of Chartered Accounts in England and Wales (ICAEW), Institute of Chartered Accountants of Scotland (TCAS) and the Institute of Chartered

Accountants in Ireland (ICAI) "as 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 records". The individual components of an internal control system are known as "controls.

The objectives which internal control designed to serve are apparent from the above definition and restated below. They are:

1.     To ensure that a structural framework exists for the efficient and effective channeling of scarce resources

2.     To ensure that policies decided on and adopted by management are consistently followed by those responsible for implementing them

3.     To ensure that expensive assets on which operations critically depends are properly secured and safeguarded to prevent misuse and misappropriation and

4.     To ensure that important documentation which provides the information on which significant strategic and tactical decisions are based provided a complete accurate and timely record of relevant events.

It is the responsibility of management to decide on and establish appropriate context Of control for the organization.

TYPES OF INTERNAL CONTROL

Management may decide on any type of suitable internal control for the organization. Some of the common types of however mentioned below:

i.                    Physical control

ii.                  Authorization and approval control

iii.                Personnel controls

iv.               Arithmetical and accounting controls

v.                 Management controls

vi.               Organizational controls

vii.             Supervision controls

viii.           Segregation of duties

INHERENT LIMITATIONS OF INTERNAL CONTROLS

No internal control system however elaborate can by itself guarantee and efficient administration and the completeness and accuracy of the records. This also because of the reasons set forth below:

1.     Two or more dishonest persons working in collusion can override the efficacy of the best possible controls.

2.     Authorization controls can be abused by those in whom the authority is vested.

3.     Management is in position to override control act by it,

4.     Pressure exerted from within and outside the enterprise can influence the integrity and company of staff.

5.     Human errors due to errors of judgment and interpretation, misunderstanding, carelessness and or distraction can undermine the effective operation of internal control.

USE OF INTERNAL CONTROL BY THE AUDITOR

The auditor's objectives in evaluating and testing internal control are to determine the degree of reliance which he may place on the information contained in the accounting records. If he obtains reasonable assurance by means of compliance tests that the internal controls are effectively in ensuring the completeness and accuracy of the accounting records and the validity of entries therein, he may limit the extent of his substantive testing.

Because of the inherent limitations in even the most effective internal control system, it will not be possible for the auditor to rely solely on its operations as a basis for his opinion on the financial statements. In some enterprises, the auditor may be unable to determine whether all the transactions have reflected in the accounting records unless there is effective internal control.

The types of internal controls on with auditor may seek to rely vary widely. A description of some of the main types of internal controls, which the auditor may find and on which he may seek to place some degree or reliance, has already been considered.

INTERNAL CHECKS

Internal checks are those day-to-day administrative controls within the internal control system which detecting and minimizing the risk of fraud and errors. Examples of these include:

1.     Controls designed to ensure proper segregation of functional duties such as those of authorization, execution, custody and recording.

2.     Supervisory controls over day-to-day activities of the organization which ensure that the work of less experienced staff as reviewed and controlled by independent, more senior and experienced staff.

3.     Controls, which ensure that the work of one person within the enterprise is prove independently by that of another person in the normal course of his work. For example, the sale ledger control clerk on the course of this normal work proves the work of a sales ledge clear independently. Both balances should reconcile.

INTERNAL AUDIT

Definition: Internal audit has been defined as an independent appraisal of activities within organization for the review of operation as a service to management. It is a management controls which functions by measuring and evaluating the effectiveness of other controls. Review of Operations

This consist of a review of all policies, procedures and practice in the working departments of the company e.g. treasury, account, purchasing, marketing, computer etc.

a)     The soundness of internal control

b)    Compliance with board or corporate directives

c)     The accuracy, timeliness and relevance of management information.

d)    The internal auditor can assist the statutory auditor in vouching, circularization cash counting stock taking attendance.

e)     The statutory auditor can assist in the training of the staff of the internal audit department.