Page 127 - DCOM204_AUDITING_THEORY

Unit 7: Internal Control

7.4 Internal Check Notes

The purpose of internal audit is to evaluate the internal check system. There is division of duties
among the employees. When all staff member are working properly it means there is effective
internal check system. The work of an auditor is reduced. He can apply test checks to complete
audit duty?

Internal checking is an accounting procedure or physical control to safeguard assets against
loss due to fraud or other irregularities. Internal check is an element of internal control. Weak
internal check mechanisms mandate a greater degree of auditing procedures. An example of
internal control is segregating the record keeping for an asset and its physical custody, such as
in the case with inventory and cash. No one individual should have complete control over a
transaction from beginning to end. Internal checks make it difficult for an employee to steal
cash or other assets and concurrently cover up by entering corresponding amounts in the
accounts.

Example: An example of internal check is the establishment of input and output controls
within a data processing department. A group or person has the responsibility of checking
control totals provided by the user department with those generated during the processing of
the data. Examples of physical controls are guards and gates to restrict access.

Self Assessment

Fill in the blanks:
1. The internal audit activity is led by the ........................

2. The purpose of internal audit is to evaluate the ........................
3. Internal checking is an accounting procedure or physical control to safeguard ......................
due to fraud or other irregularities.

7.5 Evaluation of Internal Controls with Special Reference to the

Audit of Public Sector Enterprises in India

Internal Control comprises the plan and all the co-ordinate methods and measures adopted
within an organization with the express objectives of:
1. Safeguarding the assets of the organization,

2. Verifying the accuracy and reliability of its accounting data,
3. Promoting operational efficiency, and
4. Fostering and encouraging adherence to the prescribed managerial policies.

7.5.1 Objectives and Relevance

In recent years, the relevance and objectives of Internal Accounting Controls have expanded far
beyond the traditional ambit of protection against theft and fraud, well into the areas of
effectiveness, accountability and operational efficiency of the organization. Hence the need for
evaluation of the system of internal control, while conducting the audit of the accounts of
Government organizations, whether the nature of their operations be commercial or civil.

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