Internal Check, Internal Control & Internal Audit

INTERNAL CHECK, INTERNAL CONTROL & INTERNAL AUDIT

Internal Control (Super System)
I A
T H
Internal Check
(Sub System)
S EInternal Audit
(Sub System)

PART A : INTERNAL CHECK

Meaning Aims Internal Check/
H A
Sample questionnaire for Cash & Bank
 Arrangement of

K S
 Fix Responsibility Control Questionnaire receipts
(Note : Questions to be framed as - Is there , Are
Staff duties
 No one employee  Routine procedures I
 Facts confirmation  List of systematically
& logically prepared there?)

has exclusive right

over a transaction
breakdown

A M
questions
 Reduced frauds &  Effectiveness of
 Detailed record
 Counterfoil of deposit slips
 No collusion
between employees
errors
S internal check
(adequacy &
 Comparison of counterfoils with cash receipt records
 Reconciliation
 Fraud is prevented
Example : Encashing a C A reasonableness)
 Meant for employees
of organisation
 Authorisation for opening new bank account
 Separate accounts for branches

 Issued at any time  Physical cash verification

self cheque- attending
clerk, Clerk for  Rotation of duties (Cashier's duty taken by others)
 Collect information to
Verification, Cashier This file belongsevaluate weakness
only to student
 Fair Cash book and Rough Cash book
who has purchased it from SJC Institute.
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CMA Inter Auditing Summary |1

CA Samiksha Sethia
 Internal Check, Internal Control & Internal Audit

Checklist Cut-off Procedures Examination in depth :

 Questionnaire set  Definition : Need for specific demarcation  Walkthrough Test
 Important aspects of Internal
check
between transactions of two different periods.
 Example : A
 Process : Fixation of tolerable limit

I ↓
 For audit staff
29/03/19 02/04/19
T H Selecting few transactions
↓

 Answer
Yes ⇒ Satisfactory

No ⇒ Further
Purchase
invoice
Physical
delivery of S E 100% verification with Audit trail
↓
examination received goods

H A
When should purchase be recognised as an
Analyse results with tolerable limits

 Instructions for audit staff

 Issued at commencement of audit S
expense 2018-19 or 2019-20? ⇒ 2018-19

K
 Serves as a guideline I
 Areas of Concern : Accounts, payable, Accounts
receivable, inventories, sales, purchases.

M
 Cut-off points : Serial numbers in documents

A
S
Test Checking v/s Statistical Sampling (Ref: SA 530- Audit Sampling)
Basis of distinction
Selection
Technique C A Test Checking
Selective Transactions
No specific technique
Statistical Sampling
Sample from large population
Scientific techniques, Random selection etc.
Subjective Depends on auditor's choice Depends on technique applied
Risk & Methods More risk Lesser risk
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 Internal Check, Internal Control & Internal Audit

PART B - INTERNAL CONTROL

Meaning Essentials Steps in Internal Control

 Policies, Procedures & Methods  Proper Internal Check Control Environment (tone at the

 Designed, implemented and maintained by  Proper Internal Audit

I A
top) → Entity's Risk Assessment
 Management & TCWG
 To achieve entity's objectives w.r.t -
 Division of Functional responsibility
 Proper authorization & assignment of
T H
(Plan to prevent risks)→ Control
Activities (Policies & Procedures)→

 Safeguarding of assets
 Prevention & detection of frauds & errors
duties
 Adherence with management policies
 Review & authorization of transactions S E Information & Communication
(At all levels) → Monitoring
(Assessing performance)
 Adherence of Management policies
 Reliability of financial reporting
H A
 Efficiency & effectiveness of operations

K S
 Compliance with laws & regulations
I
A M Objectives of Internal Control

S
Compliance

systems C A
Reliance on Conformity
with
Safeguarding Accurate
Security Planning Resource
Increased Efficiency

Utilization
Evaluation
Review Delegation
Authorization

accounting
principles
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 Internal Check, Internal Control & Internal Audit

Basic Elements Nature & Scope

 Financial & organizational plans  Essential prerequisite for efficient management
 Competent personnel  Extends beyond financial matters
I A
 Division of work
 Separation of record keeping & operational responsibility
 Covers operational & administrative aspects

T H
 Strong control environment includes tight budgetary control
 Separation of custody of assets & accounting
 Authorization
 Managerial supervision & review
 Control Environment depends on -

S E
 Entity's organizational structure
 Functions of BOD

H A
 Management philosophy
 Management control system

K S
Types of Internal Controls

I
Preventive
A M Detective Corrective
 Proactive controls
S
 Reactive controls
 Find errors & irregularities
 Reactive controls
 Discourage
errors
 Examples-
frauds

C A and
 Examples-
- Review of performance
 To correct errors & irregularities
 Examples-
- Implementing missing controls
- Segregation of duties - Reconciliations - Improving existing controls
- Authorisations - Physical inventory verification
- Security of assets - Audits
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 Internal Check, Internal Control & Internal Audit

Evaluation of internal control by auditor

Understanding the System [  DRI]

I A
Testing of Internal Control

Discussions with personnel

T H
Reference to organizational charts, Manuals
Inquiries
Procedural Test

→ Checking compliance of S E Examination in depth

→ Examination of few

H A
laid down procedures transactions end to end

S
Techniques Used for Evaluation

K
I
Narrative Record

A M
Check List Flow Chart ICQ

S Advantages of Internal Controls

C A
Efficiency Safeguard from Prevention of errors Employees'
Effectiveness misappropriations Satisfaction
& Economy This file belongs only to student who has purchased it from SJC Institute.
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 Internal Check, Internal Control & Internal Audit

Importance of internal controls

I A
Attainment
of goals &
objectives
Reliable
financial
Information
Prevention of
errors & frauds
Effective
& Efficient
operation
T H
Compliance
with laws &
regulations

Limitations of internal controls S E

H A
Organizational Size of
S
Unusual Transacitons

K
Costly Abuse of power
Structure (dual
command,
organization
(Small org.) I
(loss due to fire, cleverly
designed frauds)
(time and
money)
(Management
override of controls)
many lines of
authority Collusion of two
A M
Obsolescence Human error Frequent follow-up
or more people
S (due to
technology)
(in implementing
controls)

C A
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 Internal Check, Internal Control & Internal Audit

PART C - INTERNAL AUDIT

Meaning & Features Scope Need of Internal Audit
 Independent appraisal activity Covers 5 areas (Review, Verify, Ensure)
 Increased size and complexity
 by staff/ independent professional and  Reliability & integrity of financial and  Compliance requirements
I A
 Review of accounting, financial & other
operations & controls
operating information  Focus on risk management
 Compliance with laws, regulations,  Unconventional business models
T H
 a service to the organization
 analysis, appraisal & suggestions
policies etc
 Safeguarding of assets
S E  Intensive use of IT
 Stringent norms by regulators
 continuous effort for promoting effective  Economic & efficient use of resources  Competitive environment
internal control -  Accomplishing established objectives &
goals
H A
S
Provisions of section 138 of companies act, 2013 read with Rule 13 of Companies

K
Mandatory Internal Audit in - I
(account) Rules, 2014

1. Every listed company

Paid up Share
A M Turnover Outstanding loans Outstanding
Capital
S & borrowings deposits
2. Unlisted
companies

C
3.Private companies
A
public
≥ 50 Cores

-
≥ 200 Crores

≥ 200 Crores
≥ 100 Crores

≥ 100 Crores
≥ 25 Crores

-
 LEARNING TECHNIQUE
25 x 2 x 2 x 2

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 Internal Check, Internal Control & Internal Audit

Internal Audit - A management tool Functions of internal auditor

 Compliance of CARO, 2016
 Compliance of AS & policies
Appraisal Service to organization I A Other Duties
 Reliability of MIS
 Efficiency of operations  Appraise activities
of others
T
 Policies fulfilment H  Social responsibilities

 Effectiveness of IC system
 Suggest improvements
 Adequacy, reliability,accuracy of
 Reliable &

S
information
 Assets safeguard
E complete  Response to IC system
errors
 Training officer

financial, operational data

 Management by system
H A  IC system  External auditor's
responsibility
 Assistance in acquisition etc.

K S Design Works in practice  Compliance

I
Internal audit v/s Operational Audit
Basis of distinction
Objective
A M Internal audit
Compliance
Operational audit
Process improvement
Area
S Financial Accounts Business

C A
Orientation
To check
Focus
Audit
Transactions
Policies & procedures
Efficiency & improvement
Processes
Risk management
Measure Cost unless wise budget Performance improvement
monitoring
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 Internal Check, Internal Control & Internal Audit

Advantages of Internal Audit

Management Statutory Auditor

I A
Organization & other Stakeholders
 Review of IC System
 Deviations in procedures
 Can reduce no. of tests
 Reliance on stock valuation
T H
 Accurate & efficient Accounting System
 Critical review of Business Performance
 MIS appraisal
 Suggestions for improvement
 Timely completion of accounts

 Correction of FS S E
 Safeguarding of Assets
 Year end- contingent liabilities existence  Means of improvements
 Prevents error and frauds

H A  Check on resource utilization

S
Internal audit v/s Internal Control v/s Internal Check

K
Basis of distinction Internal Audit
I Internal Control Internal Check
Way of Checking
Objective
A M
Each component is checked Automatically checked
Evaluate IC System
Doubly check
Adherence to policies, safeguarding Segregation of duties - No

S assets exclusive control

Point of time
Thrust
Cost C A After occurrence
Detect frauds & errors
Additional cost involved
Simultaneously with occurrence
Fixing of responsibility
Costly in small business
Continuously
Prevent errors
No additional cost
Report Ta management MIS Reports For senior

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 Internal Check, Internal Control & Internal Audit

VOUCHING

Voucher Vouching
 Piece of substantiating evidence  Examination of documentary evidences
I A
 Written record of expenditure, disbursement, transaction
 Examples : Cash memo, Sale or purchase invoice,
 Authority of transactions
 Essence or backbone of auditing
T H
delivery challan etc.

Types of vouchers S E
H A
i) Original & collateral vouchers : Primary & supporting or copies (Sale invoice, Carbon Copy)
ii) Internal & External vouchers : Inside or outside the company (Purchase Order, Purchase Invoice)
iii) Missing vouchers :

K S
I
 Voucher not found. E.g., Cash memos, journal vouchers, TDS Certificates, copies of resolutions
 Reasons for missing vouchers -
 Wrong or careless filing
 Unawareness of statutory requirement
A M
 Intention to hide/ misappropriation
S
C A
 Auditor should cross verify with other documents
 Issue appropriate report.

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 Internal Check, Internal Control & Internal Audit

Teaming & Lading / Lapping Audit of Receipts

 Method of misappropriation of cash
 Concealing cash shortages
Cash Sales I A Sale of Fixed Assets
 Recoveries from another customer
Example :  Entity's IC over cash receipts
T H
 Entity's IC (Authorisation)

Cust
A
Cust
B
Cust
C
 Cash sales bills
 Summary book
S E  Direct sales or through agent
 Sale value of asset

` 10,000
0wn pocket
` 15,000 ` 10,000
A
 Carbon copy of cash memos
 Deposit in banks
H
 Proper accounting
 Profit or loss duly reflected

Cr. 10,000 Cr. 5,000 Cr. 10,000 .... So on

K S  Cancelled cash memos

in A in B in B
I
Auditor's procedures
A M
 Cash means consecutively numbered
S
C A
 Reconcile individual cash amounts
 Reconcile rough & main cash book
 Cash deposits in banks
 Debtor's ledgers- Part payment
 Confirmations
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 Internal Check, Internal Control & Internal Audit

Audit of expenditure

Transactions with Directors Acquisition of assets I A

 Related party transactions-(Section 188)
T H
 Authorization (Proper Authority)
 Disclosure of interest (Section 184)
 Remuneration of directors (Section 197)
S E
 Ownership (Title deeds)
 Existence (Physical verification)
 Section 179

H A  Capitalization (GST Audit, incidental expenses)

VERIFICATION Objectives

K S How to conduct verification

Meaning
 Existence I
 True & Fair View  Examine documentary evidences
 Verify Opening balances
 Enquiry into Value, Ownership,
Existence, Possession of assets &
A M
 Ownership
 Valuation
 Verify Acquisitions
 Verify Self constructed assets
liabilities
S  Arithmetical accuracy  Check Written off fixed assets
 Proving the truth

C A  Detect frauds/errors
 Adequate IC
 Free from charge
 Ensure Authorisation
 Ascertain Omissions
 Examine Title deeds
 Proper recording  Conduct Physical Verifications
 Verify Register of charges, loan agreements, repayment
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it from SJC Institute.
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 Internal Check, Internal Control & Internal Audit

Importance
 True & Fair View fo Balance Sheet
 Valuation (understated/ overstated)
I A
 Omissions (All assets & liabilities recorded)

Scope T H
Advantages
Techniques
 All account balances (assets & liabilities)  Inspection (examining documents)
 Existence  Observation (Witnessing process) S E  Manipulation of Accounts 
 Improper use of assets 
 Authorisation
 Right of ownership
 Confirmation (Obtaining

H A
corroborating written evidences)
 Proper recording & valuation 
 True & Fair View 
 Free from charge

K S
 Proper Valuation
 Proper Disclosure I
Special points while verification
 Tracing from ledger to Balance Sheet
A M
 Business purpose or not
S
 Actual existence or not
 Owned by client or not C A
 Proper classification & grouping

 Overvalued or undervalued
 Balances tallies with confirmations
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