Internal Audit
Internal audit is the review of operations and records undertaken within a business by specially assigned staff on a continuous basis. Internal audit has been defined as “the independent appraisal of activity within an organization for the review of accounting, financial and other business practices as a protective and constructive arm of management. It is a type of control which functions by measuring and evaluating the effectiveness of other types of controls.” Therefore it is clear that internal audit not only includes the verifications of accounting matters but also financial and other matters.
Objects of Internal Audit
1. To verify the correctness of the financial accounting and statistical records presented to the management.
2. To comment on the effectiveness of the internal ntrol system and the internal check system inforce and to suggest means to improve them.
3. To facilitate the early detection and prevention of frauds.
4. To ensure that the standard accounting practices to be followed by the organization are strictly followed.
5. To confirm that the liabilities have been incurred by the organization in respect of its legitimate activities.
6. To examine the protection provided to assets and the uses to which they are put.
7. To undertake special investigation for the management.
8. To identify the authorities responsible for purchasing assets and other item as well as disposal of assets.
Distinction Between Internal Check and Internal Audit
1. Internal check is an arrangement of as duties allocated in such a way that the work of one clerk is automatically checked by another while internal audit is an independent review of operations and records undertaken by the staff specially appointed for the purpose.
2. In Internal audit, a separate salaried staff of internal auditors is entrusted with the audit work but in internal check, there is no separate staff appointed especially for this purpose.Different clerks are assigned with various tasks with which they proceed and carry on checking at the same time.
3. In Internal audit, the work of a clerk is checked by an internal auditor after the former has finished the work while in case of internal check, the work of one clerk is automatically and independently checked by another simultaneously.
4. In internal audit, errors and frauds which have already been committed can be discovered but the system of internal check is so devised that the possibilities of errors and frauds are reduced to the minimum.
Internal control
Internal control has been defined as being “no only internal check and internal audit but the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the company in on orderly,manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records.”
Therefore internal control is a broad term with a wide coverage. Its scope extends beyond those matters which relate directly to the functions of accounting and financial records. In its modern sense, audit control includes two types of controls:
(a) Accounting Controls : These comprise primarily the plan of organization and the procedures and records that are concerned with and directly related to the safeguarding of assets and reliability of financial records. These include budgeting control, standard costing, control accounts, bank reconciliation, self balancing ledgers and internal auditing etc.
(b) Administrative Controls : These comprise the plan of organization that are concerned mainly with operational efficiency. They may include controls, such as time and motion studies, quality controls through inspection, performance reports and statistical analysis.From the point of view of the auditor, the distinction between these two controls, is very significant. An auditor has to make a careful review of the accounting controls in order ensure the accuracy and adequacy of financial statements. He is not expected to review the administration controls because they have only a remote relationship with financial records. However he may evaluate only those administrative controls that have a bearing on the reliability of financial statements.
Characteristics of Good Internal Control System
1. There should be a well developed plan of organization with delegation of proper responsibilities at various levels of operational hierarchy.
2. These should be a scientifically developed system of record procedures with a view to maintain reasonable control over assets, liabilities, revenues and expenses.
7. To undertake special investigation for the management.
8. To identify the authorities responsible for purchasing assets and other item as well as disposal of assets.
