Sunday, 29 December 2019

Unit 4: Internal Control

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Unit 4: Internal Control

The internal audit activity evaluates risk exposures relating to the organization’s governance, operations and information systems, in relation to: Effectiveness and efficiency of operations; Reliability and integrity of financial and operational information; Safeguarding of assets; Compliance with laws, regulations, and contracts.

Internal check is an element of internal control.

Weak internal check mechanisms mandate a greater degree of auditing procedures.

Control procedures encompass policies and procedures established by the Management, in order to provide for the attainment of certain objectives.

These could include the existence of systems for: An effective system of reconciliation of Books of Accounts; Check of the arithmetical accuracy of the records; Controls over computer applications and environment; Maintenance of control accounts and Trial Balances; Approval and control of balances; Comparison of results of cash, security and inventory checks with accounting records; Limiting direct physical access to assets and records, etc.

A strong control environment (e.g.one with tight budgetary controls and an effective audit function) can significantly complement specific controls.

Control procedures encompass policies and procedures established by the Management, in order to provide for the attainment of certain objectives.

Evaluation of Internal Controls by the questionnaire methods (used in conjunction with other methods.) is a convenient and efficient medium for documented evidence of such review having actually taken place.


Notes Accounting Controls: The plan of organization and all methods and procedures that are concerned mainly with, and relate directly to, safeguarding of assets and the reliability of financial records.

Administrative Controls: The plan of organization and all methods and procedures that are concerned mainly with operational efficiency and adherence to managerial policies, and usually relate only indirectly to the financial records.

Control Activities: Control activities are the specific policies and procedures management uses to achieve its objectives.

Control Environment: The control environment is the control consciousness of an organization; it is the atmosphere in which people conduct their activities and carry out their control responsibilities.

Detective Controls: Designed to find errors or irregularities after they have occurred.

Internal Auditing: Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.

Internal control: Internal control is the process designed to ensure reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations.

Preventive Controls: Designed to discourage errors or prevent irregularities from occurring.

They are proactive controls that help to prevent a loss.

Statement on Standard Auditing Practices (SAP): The Statement on Standard Auditing Practices (SAP) pertaining to the "Study and Evaluation of the Accounting System and Related Internal Controls in connection with an Audit", defines the inter-relationship between the Statutory Auditor and internal control.

Systems Control Evaluation (SCE): It is based on the questions and answers exercise illustrated above, is thus designed to identify the controls in the system which would satisfy the general audit objectives (prevent or detect the various types of material errors).


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