Page 59 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes From the above classifications, it is clear that internal control goes beyond the accounting
functions of the organization and incorporates both accounting and administrative controls.

For your better understanding of the concept, as example, we are giving below some of the
important matters to be decided in connection with controls relating to fixed assets:

1. Who authorizes capital expenditure and how such authorization is recorded and
authenticated?
2. Who authorizes the sale, or transfer of fixed assets (including scrap/defective/obsolete
etc.) and how such authorization is recorded and authenticated?
3. Who maintains accounting records in respect of fixed assets and how it is being ensured
that capital and revenue expenditure are separately recorded?
4. Who maintain fixed assets registers and how frequently they are agreed with relevant
accounts and physically verified?
5. What arrangements are being made to ensure that fixed assets are properly maintained
and used for the service of the company (i.e. by periodic physical checks as to their location,
operation and condition)?
6. Where the fixed assets are transferred between branches or companies of the same group,
what arrangements in respect of pricing, depreciation and accounting are to be made?
7. How depreciation rates are to be authorized and evidenced and which persons are to be
responsible for carrying out and checking necessary calculations?

4.3 Characteristics of an Effective Control System

Internal control is the whole system of controls, financial or otherwise, established by the
management in order to carry on the business of the enterprise in an orderly manner, safeguard
its assets and secure as far as possible the accuracy and reliability of its records.

Now question arises, whether internal control system is effective or ineffective, how you will
determine it. Obviously, there are certain special characteristics of an effective internal control
system which are discussed below:
1. Plan of organization: A proper plan and an appropriate structure of the organization is a
must for implementation of an effective internal control system. It is true that the
appropriate structure will be different for different organizations but few features are
common for all. Some of them are as follows:

 Organization structure should facilitate independence of different functions
performed at different level.

 There should be a clear demarcation between the department which conducts the
activities and the department which records the activities.
 Similarly, there should be a clear demarcation between the department which is
custodians of the assets and the department which maintains account relating to
those assets.
 Authorities and responsibilities of each department should be clearly defined based
on the policies of the management.
 There should not be any scope of duplication of jobs, duties and assignments in the
organization structure.

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