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INTERNAL CONTROL SYSTEM

INTERNAL CONTROL
Accounting systems & Internal Control:

Accounting systems can be defined as a series of tasks in an entity by which

transactions are processed as ameans of maintaining financial records. Such a
system should recognize, calculate, classify, post analyse, summarise and report
transactions.

Understanding of Accounting systems and related internal controls:

The auditor should gain an understanding of the accounting systems and the
related internal controls and should study and evaluate the operation of those
internal controls upon which he wishes to rely in determing the nature, timing
and extent of other audit procedures. Where the auditor concludes that he can
rely on certain internal controls, his substantive procedures would normallhy be
less extensive than would otherwise be required and may also differ to their
nature and timing.

INTERNAL CONTROL

Accounting Control Administrative Control

1. Prevention &detection of 1. Budgetary Control

Fraud and errors
2. Safeguarding of Assets 2. Quantitative Control
3. Accuracy of completeness of
Accouting records
4. Preparation of Financial information

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INTERNAL CONTROL SYSTEM

INTERNAL CONTROL FLOW CHART

Purchase department

Purchase order

Accounts Department (1 copy retained) Supplier

Receiving Department

Goods Received Note

(1 copy retained)

Stores department

DELIVERY REQUISITION SLIP

Sales Department

Dispatch Department

GOODS SENT NOTE

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INTERNAL CONTROL SYSTEM

Internal Control over Purchase Department:

The Purchase department should receive Indent from stores/stock Department.

An indent will contain the particulars such as:

1. Nature of goods to be purchased

2. Quantity required and
3. Relevant details of previous order for the same goods.

Based on the indent, Purchase order is made in quadruplicate :

1. For purchase department for further reference

2. Accounts department
3. Stores/Stock department
4. Original purchase order sent to Supplier.

Internal control over Goods receiving Department:

Receipt of goods: The receiving department should verify the goods before
accepting delivery against the delivery order. Goods should match all details in
the purchase order such as quantity, quality, model etc.

Preparation of GRIN: Receiving department should make an entry in the Goods

Inward Register and prepare a Goods Received Note in quadruplicate:

1. Original GRN retained by Goods Receiving department.

2. One copy sent to Purchase department. Purchase department should
compare this GRN with the Purchase Order & take follow up action in case
of any discrepancy.
3. One copy is sent to Stock/Stores department along with the goods.
4. One copy is sent to supplier, duly signed and sealed confirming receipt of
goods.

Internal Control over Accounts Department:

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INTERNAL CONTROL SYSTEM

The Accounts department, on receipt of invoice from the supplier will match the
invoice with the copy filed in the stock department and after thorough
verification, pass the bill for payment.

Internal Control over Stocks/Stores Department:

The Stock/Stores department after receiving the goods from the receiving
department along with the GRIN will make the entries in the Bin Cards and Stock
Register.

The stock department monitors the stock levels continously and if any goods are
to be reordered, it should do so immediately by raising an indent to the purchase
department.

Internal Control over Sale of Goods:

Sales department should prepare pre-determined goods Delivery Requisition Slip

in quadruplicate:

1. Original copy is retained by the Sales Department.

2. Two copies sent to stock department. The Stock department retainsop one
copy and sends another copy along with goods to dispatch deprtment.
3. Last copy is sent to accounts department. On receiving dispatch note from
dispatch department, the accounts department shall prepare an invoice to
be sent to the customer for the supplies made.

Dispatch department shall prepare Goods Sent Note or dispatch Note in

quadruplicate.

1. One copy retained by dispatch department.

2. One copy sent to sales department.
3. One copy sent to accounting department.
4. Last copy sent to customer along with the goods.

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