Internal Audit & Control-1

8/6/2019 Internal Audit & Control-1

1/5

Q. Explain the principles of internal control.

Ans. Internal Control principal are:

A) EFFECTIVENESS

Control should help in providing information being relevant and pertinent to the

business process as well as being delivered in a timely, correct consistence and usable

manner.

While studying for this course if you do not get the required text books, study

materials in time or without proper contents, even if you have a goal to complete the

course, you may not be able to do so.

B) EFFICIENCY

Controls should achieve the optimal use of resources.

Think of a rule where three executives have to sign a payment cheque in a company.

It consumes a lot of extra executive- time and administration s time and results in

avoidable losses. It does not make much difference, instead, if two executives are

designated to sign cheques.

C) COFIDENTIALITY

Internal controls should result in the protection of sensitive information from

unauthorized disclosure. As one of the objectives of internal controls is to safeguard

the assets, it is important that person not authorized to receive any information or

exercise an authority should not be permitted to do so.

If the controls set up by you do not prohibit outsiders from entering your companys

premises without your permission, there is all the possibility that the unwanted

outsiders later may create problems for you.

D) INTERGRITY

Internal control should achieve the accuracy and completeness of information as well

as to its validity in accordance with business values and expectations.

The reports generated by your systems should provide you all the information to make

decisions. A sales report might not disclose you the person who is n change of a

particular territory or product. You will not be able to make decisions immediately

based on the report. You might require information about the executive who heads

that particular territory or product.


2/5

E) AVAILABILITY

Internal controls should process the information which should be made available

when required by the business process now and in the future. Thus the safeguardingof necessary resources and associated capabilities become important.

You may have to save data in CDs or floppies for future use. Back-ups may have to

be taken

F) COMPLIANCE

We have already studied that internal controls should achieve compliance with those

laws, regulation and contractual arrangements which the business process is subject

to. Compliance also should be achieved with reference to various policies of the

management.

If re remuneration is being paid by your company, the internal controls set up by the

company should also include rules also to various deductions to be made from salary

like provident fund, income tax. If no attention paid by your company in this regard,

there would be non-compliance of the rules of acts pertaining to provident fund or

income tax. And such non-compliance would ultimately result in penalties, additional

time and resources wasted by your company leading to losses

In your case, even if you studied methodically and under stood everything, if you

have not complied the rules of the university as to appearing for exam like applying

within the due date, paying the prescribed fees in the prescribed mode etc, you might

not be able to appear exams.

G) RELIABILITY

Internal controls should aim to the provision of appropriate information for

management to operate the entity and to exercise it financial and compliance reporting

responsibilities.

When you are studying for exams, the text books you study should be those that are

prescribed by the university. If you rely on: notes: or: guides: prepared by others, lateryou may repent on none of the questions from these appeared in the exam.

Thus any set of rules, procedures or policies have to be evolved by an organization

keeping the entire above principal in mind so that they do not become redundant later.


3/5

Q 2. What is a flow chart? Explain the different types of flow chart.

Ans. Flow chart is a graphic presentation of each area of a companys internal control

systems. Use of flow chart symbols which are standardized is made here. Some

symbols are provided here below.

Flow chart can be of different types as follows:

Control flow chart

Data flow chart

Process flow chart

Linear responsibility charts

Merits of flow charts

East to recollect

Summarizes the internal controls at one place and provides a birds eye view.

Communication is easier through the use of flow chart

Demerits of flow charts:

No final description is possible as internal controls change due to changes in

the environment

Preparing a flow chart is a complex job.

Preparing a flow chart is a time-consuming job.

Flow chart provides only historic or static descriptions of controls.


4/5

Q 3. Describe access control and physical and logical assets control.

Ans. 1. Access control

Fixing authority levels to various persons, deciding levels of access to informationetc. are a strong feature of internal control.

For example, you can set up limits on the payments that can be made by a particular

cashier, the amount that can be withdrawn from the bank by an executive of the

company etc.

Similarly, in a computerized environment who can view what information can also be

decided.

In fact the management function of delegation is a control activity. Because

delegation involves three elements; authority, responsibility and accountability asgraphically mentioned in the triangle of effective delegation.

Thus, if manager were to delegate effectively, the internal controls also would be

strong than when they don not delegate or delegate ineffectively.

2. Physical Controls

Safeguarding of the assets is one the important objects of a business so that losses are

avoided. Hence physical controls are important part of internal control.

For example, you can appoint a watchman in your organization so that the risk of

burglary is avoided or at least minimized.

Physical control applies also to data base. Hence taking a back up also is a type of

safeguarding of assets.

Physical control also includes preserving the assets from wear and tear taking

insurance and such other related measures.


5/5

3. Logical Assets Control

We have seen that ultimately stakeholders rely on financial reports, hence goodaccounting controls through use of proper accounting standards and policies helps in

effective internal controls.

A firm not maintaining financial or accounting records, even if it has strong

operational controls might not achieve success a managers may not be able take

decisions due to unreliable data.

Most of the todays organizations have perfect systems of accounting for each and

every monetary transaction and events of the business. However, as has already been

explained, these are days of corporate actions. In spite of maintaining books of

account under the double entry systems of accounting, the companies may fail todisclose important information to stakeholders, therefore benchmarks like accounting

standards of GAAPs, may have to be adhered to by the companies while maintaining

books of account.

Consider for example, an accounting standard on segment reporting stipulates that

financial statements should provide information as to performance of a company

under different business segments like product wise or territory wise if the accounting

system of the company does not provide such information, there would be non-

compliance of the accounting standard.

Documents

Internal Audit & Control-1