INTERNAL CHECK,

INTERNAL CONTROL,
INTERNAL AUDIT
INTERNAL CHECK
Meaning and definition:

Internal check is a process whereby work of one employee is

checked by the other.

According to Spicer and Pegler, Internal check is an arrangement

of staff duties where none is allowed to carry through and record
every aspect of a transaction so that, without collusion between any two
or more persons, fraud is prevented and at the same time the
possibilities of errors and frauds are reduced to the minimum.
Auditor’s Duty in regard to Internal Check System

Auditor may apply test check methods [(i.e.) He may take samples
of the activities undertaken by the employees and test those samples
as a representative for whole population] while examining the
internal check system of the organization.

The existence of a good internal check system reduces to a great

extent the work of the auditor but does not reduce his liability. To
what extent an auditor should depend upon the internal check system
will depend upon his tact, skill, experience and judgment.
Auditor’s Duty in regard to Internal Check System
The internal check is said to have the following fundamental aims:
To pin down to definite persons responsibility for particular acts,
default or omission, by the segregation of tasks.

To obtain confirmation of facts and entries, physical and financial,

by the creation and preservation of necessary records.

To facilitate the “breakdown” of routine procedures so as to avoid

bottlenecks and to establish an even flow of work.

To reduce to a minimum the possibility of fraud and error.

Checklist:
Check list is usually a questionnaire set, designed to draw attention
to important aspects of the system of internal check.

The question should be phased in such a way that an affirmative

answer would normally reveal a satisfactory position.

If the answer is negative, enquiry should be made to see if there is a

satisfactory substitute for the procedure referred to in the
questionnaire.

All the items on the questionnaire cannot be of the same importance

and an unhealthy position might be revealed by a negative answer.
Internal control questionnaire:

The internal check system questionnaire is a list of systematically

and logically prepared questions designed to find out and evaluate
the effectiveness of the internal check system regarding various
aspects and accounting transactions of an organization.

Statutory auditor will submit to the organization a complete

questionnaire for reply by concerned official which will help the
former to form an opinion as to the adequacy and reasonableness of
the internal check system.
DIFFERENCE BETWEEN A CHECKLIST AND
INTERNAL CONTROL QUESTIONNAIRE
Basis Check List Internal Control questionnaire
Issued during commencement It can be issued at any point of
Point of
of audit and reported back after time and reported back
Time
completion of audit immediately.
Issued to the audit staff to be
Issued to various people at
followed by them during audit
Issued to different levels in the
and reported back at
organization.
completion
contains questions to be
contains instructions to be
Contents answered by the employees of
followed by audit assistants
the organization
Used to collect the information
Works as a guideline for audit
Objectiv to know about the internal
staff so that no major issues
e control system and to evaluate
remains unchecked.
the weaknesses therein.
DISTINCTION BETWEEN INTERNAL AUDIT,
INTERNAL CONTROL AND INTERNAL CHECK
It consists of procedures
adopted to assist in achieving Internal control
the objective of efficient
conduct of business.
Internal
audit
It is a continuous
critical review of
financial and
operating activities
by an internal auditor
Internal
check
A system of allocation of
responsibility, division of
work, and methods of
recording transactions,
whereby the work of an
employee is checked
continuously by another.
DISTINCTION BETWEEN INTERNAL AUDIT, INTERNAL
CONTROL AND INTERNAL CHECK
Basis Internal Audit Internal Control Internal Check
Point of Time Work is checked Checking is done Work of an
after it is done. simultaneously with employee is checked
the conduct of work. continuously by
correlating it with
the work of others
Objective Evaluate the internal Ensure adherence to Ensure that no one
control system and to management policies, employee has
detect frauds and safeguarding of exclusive control
errors. assets, prevention over any transaction
and detection of or group of
frauds and errors, transactions and their
accuracy and recording in the
completeness of books
accounting records.
Basis Internal Audit Internal Control Internal Check
Thrust of The thrust of internal The thrust of internal
The thrust of internal check
system audit system is to control system is to lies in fixing of
detect errors and prevent errors. responsibility and division
frauds. of work to avoid
duplication
Cost cost is involved in The system proves to Does not add to the cost.
Involvement addition to be costly
accounting
Report The internal auditor Internal Controls The summary of day to day
submits his report to provide for built in transactions work as report
the management MIS reports for the senior
Cut – off procedures:
Definition:
Cut-off procedures are adopted to allocate revenues and costs to the
proper accounting period.

Areas of concern:
Accounts payables and
Accounts receivables.

Importance:
Cut-off procedures require detailed testing by the auditor so as to
ensure proper accounting of assets and liabilities, which may arise
without the corresponding physical delivery of goods taking place.
Process of examination in-depth:
 Fixation of the maximum tolerable error limit.

 Selecting a few transactions in each area of audit to be checked

 Verification of those selected transactions- 100% by verifying the

accounting aspects, internal control aspects, documentation and audit
trail.

 Audit trail refers to the documents, records, books and files, which
enable an auditor to trace a transaction

 Analysis of the results with the maximum tolerable error limit.

DIFFERENCE BETWEEN TEST CHECKING
AND STATISTICAL SAMPLING
Basis Test checking Statistical sampling
Selective transactions are Drawing a sample from a Large
Selection
verified. number of transactions.

Techniqu
No specific technique is used Selection on random basis.
e

Subjectiv It is subjective and depends It depends upon the statistical

e upon the choice of the auditor technique applied

It involves more risk as there It carries lesser risk and various

Risk &
are no specific methods for test statistical methods can be used
Method
check at different times
INTERNAL CONTROL SYSTEM
 Meaning and Definition

The internal control system comprises all the methods and

procedures adopted to assist in achieving the objective of:
Efficient conduct of business,
Ensure adherence to management policies,
Safeguarding of assets,
Prevention and detection of frauds and errors, and
Checking the accuracy and completeness of the accounting records.
 Essentials of an Internal Control System

An efficient internal control system should provide the followings:

For proper division of functional responsibilities.
For proper authorization and assignment of duties to perform and
record the transactions.
For adoption of proper practices for adherence with management
policies.
For proper review and authorization of all transactions before they
are recorded in the books of accounts and safeguard all business
assets.
Proper internal checks
Proper internal audit system.
 Objectives of an Internal Control System

Compliance Reliance Safeguarding Security

Conformity
Increased Review and
Authorization with accounting
efficiency correction
principles

Resource
Delegation
utilization
Advantages of an Internal Control System

Efficiency, Prevention of
effectiveness and errors and
economy irregularities

Safeguard from
Employees’
irregularities or
satisfaction
misappropriations
 Types of Internal Control Systems

Types of Internal
Control System

Preventive Control Detective Control Corrective Control

They are designed

to discourage They are designed Target at the
errors or to find errors or correction of
irregularities from irregularities after errors and
occurring. (E.g.) they have irregularities as
segregation of occurred. (E.g.) soon as they are
duties Reconciliations detected.
 Types of Internal Control Systems

Steps in Internal
Control

Control Assessment Control Information & Monitorin

Environment of Risk Activities Communication g
 Nature and Scope of Internal Control

Nature:
Internal control is an essential prerequisite for efficient and effective
management of any organization. It is, thus a primary responsibility of every
management to establish and maintain an adequate system of internal control
appropriate to the size and nature of the business of the entity.

Scope
‘Control’ represents the overall attitude, awareness and actions of directors
and management regarding the internal control system of the entity. For example,
in a strong control environment, there would be tight budgetary controls and an
effective internal audit function.
 Importance of Internal Control

Important of
Internal Control

Attainment Compliance Efficient

Reliable Prevention
of Goals with Laws and
Financial of frauds
and and Effective
Information and errors
Objectives Regulation Operation
 Limitations of Internal Control

Organizational Size of the Unusual

Structure Organization Transactions

Collusion of two
Costly Abuse of Power
or more People

Potential for
Obsolescence
human error
 Responsibilities of Management Vis-A-Vis Auditors
Responsibility of Management
The prime responsibility for maintaining an adequate accounting
system and incorporating various internal controls rests with the
management.
The responsibility of closely monitoring the system to ensure that it
is in place, so as to facilitate the basic objectives of installing it, also
rests with the management
Auditors Responsibility
To safeguard his own interests, the auditor might resort to
examination and evaluation of the internal controls that exist in the
organization.
The auditor should bring the weaknesses of the internal control
system, if any, to the management’s notice through a “letter of
weakness” or “management letter”.
 Evaluation of Internal Control By the Auditor
Understanding the System
This can be done in the following ways:
Discussions with personnel at various levels of the organization.
Reference to organization charts, procedure manuals, information
flow channels, etc.
Testing of internal control

Testing of
Internal Control

Procedural Examination in
Test Depth
 Evaluation of Internal Control By the Auditor
Techniques for Evaluation of Internal Control System:

Techniques of
Internal Control
System

Internal
Narrative
Check List Flow Chart Control
Record
Questionnaire
INTERNAL AUDIT
 Meaning and Definition
Internal audit is an independent appraisal activity within the
organization by the staff of the entity or by an independent
professional appointed for that purpose.

According to the Institute of Internal Auditors New York,

“Internal audit is an independent appraisal activity within the
organization for the review of financial, accounting and other
operations done as a basis of service to the management. It is a
managerial control which functions by measuring and evaluating the
effectiveness of other controls”.
 Internal audit as per Companies Act, 2013
As per Section 138 of The Companies Act, 2013, Internal Audit is
required by –
Such class or classes of companies as may be prescribed shall be
required to appoint an internal auditor, who shall either be a chartered
accountant or a cost accountant, or such other professional as may
be decided by the Board to conduct internal audit of the functions
and activities of the company.

The Central Government may, by rules, prescribe the manner and

the intervals in which the internal audit shall be conducted and
reported to the Board.
 Areas of Internal audit:

Areas of Operations

Compliance
with laws, Reliability Accomplishing
Economic
policies, and integrity of established
Safeguarding and efficient
plans, of financial objectives and
of Assets use of
procedures and operating goals for
resources
and information operations
regulations
 Features of Internal audit
 Independent appraisal activity within the organization
 It can be conducted by the staff of the entity or by an independent
professional appointed for that purpose.
 Conducted for review of accounting, financial and other operations and
controls established within an organization
 conducted as a service to the organization and is not a part of the
organization
 intends to furnish the analysis, appraisals, suggestions and information
concerning the activities reviewed to the management
 Internal auditing functions as a continuous effort for promoting effective
control at reasonable cost.
 Functions of Internal Audit
As a service to the
An appraisal function Other duties
organization
• To appraise the • To ensure the • Implementation of
activity of others, following: social responsibility
not to perform a • Policies fulfilled. policies.
specific part of data • Information it
processing. requires to manage • Response of the
effectively is internal control
reliable and system.
complete.
• Assets are • Training officer in
safeguarded internal control
• Internal control
system is well • Compliance with
designed. external regulations
 Scope of Internal audit
 Review the reliability and integrity of financial and operating information
and the means to locate, identify measure, classify and report such information.
 Appraise the economy and efficiency with which resources are employed.

 Review the systems established to ensure compliance with those policies,

plans, procedures, laws and regulations which could have a significant effect and
impact on operations and report, and should determine whether the organization
is in compliance.
 Review the means of safeguarding assets and as appropriate verify the
existence of such assets.
 Review operations or programs to ascertain whether results are consistent with
established objectives and goals and whether the operations or programs are
being carried out as planned.
 Need for Internal audit

Focus on Risk
Increased Size and Enhanced
Management and
Complexity of compliance
Internal Controls
Business requirements
to manage them

Intensive use of Stringent Norms

Unconventional
Information to Protect
Business Model
Technology Investors

Increasingly
competitive
environment
 Internal Audit – A Management tool
 Ensures compliance of Companies (Auditors Report) Order, 2020

 Compliance of accounting standards and policies

 Reliability of MIS through internal audit’s independent appraisal and review

 Evaluate Various problems independently and suggest improvement

 Makes the internal control system effective

 Adequacy, reliability, accuracy and understandability of financial and

operational data
 Performs as an integral part of ‘Management by Objective’ system

 Can add valuable assistance to management in acquiring new business,

promoting new products and expansion or diversification of business etc.
 Difference between Operational audit and internal
audit.
Internal Audit Operational Audit
Compliance objective Risk identification, process
improvement objective
Financial accounts focus Business focus
Audit focus Efficiency & improvement focus
Transaction-based Process-based
Policies and procedures focus Risk management focus
Focus on policies, transactions and Focus on goals, strategies and risk
compliance management Processes