What is Internal control? Internal control means all measures taken by the management to improve working efficiency, to protect the asset from misuse, to check reliability and accuracy or accounting record, and, to see that prescribed policies of the management are follower’. The management is responsible for establishing and maintaining system of internal control. The internal’ control system consists of accounting controls and administrative controls. Accounting controls are necessary for safeguarding assets and reliable accounting record. These controls are developed to provide assurance that transactions are processed after authorization. Such transactions are recorded under accounting principles and employees are responsible for keeping assets. The employees are allowed to use assets with permission from management. The action is taken when assets are not properly handled. The administrative controls refer to the procedure for making decisions. The budgetary control, quantitative control, quality control, policy matters, work standards, internal check, internal audit and periodic reporting are part of internal control.
DEFINITION OF INTERNAL CONTROL
According to International Standards on Auditing an internal control means the policies and procedures adopted by the management for systematic and efficient conduct of its business, including adherence to management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
Walter B. Meigs says that it consists of all measures taken to provide management with assurance that everything is functioning as it should.
Spicer and Pegler say that it means the whole system of controls, financial or otherwise established by the management in the conduct of a business, including internal check, internal audit and other forms of control.
It is clear that internal controls are procedures that ensure that transactions are recorded properly and everything is working as per management policies and plans.
OBJECTIVES OF INTERNAL CONTROL
- ASSETS PROTECTION: The purpose of internal control is to protect assets of the business entity, The assets are used in the business. These assets are in the custody of responsible officers. So assets are not destroyed or misused.
- ACCURATE RECORD: The purpose of internal control is to maintain accurate accounting record. The business transactions are processed under generally accepted accounting principles after authorization of competent person.
- FOLLOW POLICIES: The purpose of internal control is to follow policies management. The policies are broad guidelines for obtaining business objectives. All employees try their best to follow rules of the game.
- PREVENTION OF ERRORS: The purpose of internal control is to prevent errors. There may be an unintentional mistake due to overwork or carelessness. There is normal workload with every person. The senior person checks the work of a junior person.
- PREVENTION OF FRAUDS: The purpose of internal control is to prevent frauds. It is an intentional misrepresentation of financial information by one or more individuals among management, employees or third parties.
- BEST USE OF RESOURCES: The purpose of internal control is the best use of resources. There is a need for an optimum combination of resources for maximizing profits. Internal control can point out a weakness that can be removed.
- NATURE OF TEST AUDIT: The purpose of internal control is to determine the nature and extent of audit test. When there is effective internal control there will be few audit tests otherwise there will be a need for thorough checking.
- RELIABLE RECORD: The purpose of internal control is to maintain reliable accounting record. The equal distribution of work among the employees provides the complete and reliable record, as it is free from errors and frauds.
- REDUCE WORKLOAD; The purpose of internal controls is reduction Of workload. The effective internal controls can be useful for auditors. They can check few items remaining items will be treated as checked by the auditor.
- LOCATION OF ERRORS AND FRAUDS; The purpose of internal controls is to locate frauds and errors. There are many types of errors and frauds that may be found in the accounting record. The compliance and substantive tests may be applied to detect the frauds.