2. Layout
Internal control: Meaning &
Objectives
Internal check: Meaning, objectives
and principles
Wage payments, Cash sales, Cash
purchases
Internal Audit: Meaning,
Advantages & Disadvantages
Difference between internal check &2 Prepared by: Ms. Himani R.
3. Internal control
“The whole system of controls, financial and
otherwise, established by the management in
order to carry on the business of the company in
an orderly manner, safeguard its assets and
secure the accuracy and reliability of its
records.”
The objectives of internal control are:
To avoid inefficiency, wastage and fraud
To attain the maximum accuracy & reliability in
maintaining the books of accounts
To measure how far the policies of the
business are being implemented3 Prepared by: Ms. Himani R.
4. Internal check
Internal check is a part of internal control.
No employee is allowed to do a job from
the beginning to the end and also not
allowed to deal with one book throughout
the year.
“A system of internal check is an
arrangement of staff duties whereby, no
one person is allowed to carry through
and to record every aspect of a
transaction, so that without collusion
between two or more persons, fraud is4 Prepared by: Ms. Himani R.
5. Objectives of internal check
To ensure proper division of work
Since the work is divided into small units
the responsibility of each individual can
be fixed.
To minimize the frauds and errors in the
beginning of the audit
To cross-check the work done by each
employee
The auditor can go for selective checking
instead of detailed checking5 Prepared by: Ms. Himani R.
6. Principles of internal check
The work should be allocated among the staff
of the business according to the duties,
responsibility and rights in such a manner,
that there is no room for interference.
No single person should have an independent
control over all important aspects of the
business.
The duties among the staff of the business
should be changed from time to time so that
no staff should be engaged in a particular job
for a long time.
Every member of the staff should be
encouraged to go on leave at least once in a
6 Prepared by: Ms. Himani R.
7. Continued
An efficient system of internal check should
provide for an automatic checking of the work
of an assistant by the other.
The division of work should not be much
expensive.
The financial and administrative power should
be assigned very judiciously to different
officers.
Person having physically custody of asset
must not be permitted to have an access to
the books of account.7 Prepared by: Ms. Himani R.
8. Internal check as regards Cash
Sales
In big business houses, where daily
transactions of cash sales are larger in
number, there are many chances of
fraud and irregularities.
Cash sales may take 3 forms:
Sales at counter: 4 copies of cash
memo: Salesman, Cashier, Counter,
Customer
Sales by travelling agents: to push sales
to the new ones and collect debts from
the old ones
8 Prepared by: Ms. Himani R.
9. Internal check as regards Cash
purchases
Common mistakes: Fictitious payments, Same invoice
recorded twice, To inflate profit goods purchased may
not be entered, Goods not received may also be
entered
Purchases should be recorded separately for better
control. Work connected with the purchases:
Assessment of the requirements
Enquiry
Placing orders
Receipt of goods
Recording and making payments
Goods received note should be prepared with the
following details: Date of receiving, Name of the
supplier, Invoice note number, description and code
9 Prepared by: Ms. Himani R.
10. Internal check as regards Wages
Time
recordin
g clock
Attendanc
e register
Punchin
g
machine
Use of
tokens
Pass-out
records
Payment of
wages
Preparation
of wage
sheets
Maintenance
of wage
records
Overtime
records
Piece
work
records
Time
records
Computer
s
10 Prepared by: Ms. Himani R.
11. Internal audit/ Operations audit
An internal audit is conducted for a
systematic examination of the records,
procedures and operations of an org.
2 types of internal audit: Mgt. &
Propriety audit
Definition: “Internal auditing is an
independent appraisal activity within an
org for the review of operations as a
service to mgt. It is a managerial control
which functions by measuring and11 Prepared by: Ms. Himani R.
12. Objects of internal audit
Reliability and integrity of information
Compliance with plans, policies,
procedures, laws and regulations
Safeguarding of business assets
Economical and efficient use of
resources
Accomplishment of established
objectives and goals for operations
12 Prepared by: Ms. Himani R.
13. Advantages:
Continuous check on accounting records
and accounting staff
Errors and frauds will be detected at an
early stage
Final accounts will be made easily
Business activities are continuously
reviewed
Facilitates adoption of standard
accounting practices
Disadvantages:
Adverse effect on accounting staff13 Prepared by: Ms. Himani R.
14. Internal check v/s Internal audit
Evaluation of
accounting and
clerical accuracy
Work is mechanically
checked in the
process of being
performed
Requires no
separate staff so no
additional financial
burden
Aims at minimizing
errors & frauds
Evaluation of
effectiveness of
management control
Like a post-mortem
examination, where
work is already done
Requires separate
staff so additional
financial burden is
there
Aims at discovering
errors & frauds14 Prepared by: Ms. Himani R.
15. Internal audit Statutory audit
Appointed by
management
Appointed by
shareholders/ BODs/
Central Govt.
Appointing is optional Appointing is
compulsory
He may/may not be a
CA
Should necessarily be a
CA
He is an employee of
the Co.
He is an outsider
A type of continuous
audit
Conducted at the end of
a financial year
Evaluates activities of
mgt
Evaluates final accounts
15 Prepared by: Ms. Himani R.
