UNIT II
INTERNAL CONTROL
Meaning:
"The whole system of controls, financial or otherwise, established by the
management in order to carry on the business of the company in an orderly manner safeguard its
assets & secure as far as possible the accuracy & reliability of its record".
Definition:
Internal Control has been defined as, “A plan of organization & all the methods & procedures
adapted by the management of an entity to assist in achieving management objective of ensuring
as far as practicable orderly & efficient conduct of the business''.
Objectives of Internal Control:
To evaluate the efficiency of performance in the various activities of the business.
To ensure orderly, efficient & economic conduct of the business.
To see that access to & use of assets are made only with proper authorization.
To safe guard the assets of the organization by preventing frauds, waste & inefficiency.
To ensure that there is periodical verification & comparison of assets in existence with those of
accounting records & appropriate action is taken, when there is any difference between the
two.
To ensure that transactions are recorded in the proper books of accounts regularly, correctly &
systematically according to policies & procedures & the accounts are accurate & reliable.
Advantages of internal control
An audit control system can give the following advantages:
1. Detection of Errors and Frauds: Internal control systems are structured in such a way that work
done by one employee in a process is checked by another without knowledge of the former.
In such an environment, any fraud committed is brought to light unless there is collusion
among fraudsters.
2. Time Saving: Auditor can test check or sample check the transactions to ensure reliability, and
accuracy of entries in the books. Hence, he can complete his audit work and prepare financial
statements within the prescribed time.
3. Minimum Scope for Errors and Frauds: Each employee does only a limited work assigned to
him, moreover, consciousness of his work being independently checked by another keeps him
to be always alert at work. In such a context, chances for commission of error or fraud are
lesser.
4. Operational Efficiency:
It facilitates fixation of accountability, error – free work performance, accuracy reliability and
authenticity of entries and eradicate inefficiency, fraud, theft, etc. Moreover, this system
enables the management to assess the performance of employees. All these collectively
contribute to enhance the operational efficiency of organization as a whole.
Limitations of internal control
An audit control system can give the following limitations or disadvantages:
1. Organizational Structure: Deficiencies in organizational structure make internal control
ineffective.
2. Size of the Organization: Small organizations have very low levels of internal control, which
are almost negligible due to more interference by owners and management.
3. Unusual Transactions: The internal control procedures normally fail to keep a check on
