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In this chapter, we will discuss how Internal Control works in Auditing. Internal Control system is
one of the basic and essential factors for efficient and effective management. It covers the whole
management system of an organization, both financial or non-financial. Internal control system is
helpful for the management and also the Auditor in achieving goals and targets effectively.
Therefore, internal control system covers a number of checks and control to ensure efficient and
economic working.
There are two types of controls — Financial Control and Administrative Control. Reliability of
financial records and safeguarding of assets is a part of financial control. We will now understand
in detail what Internal Control System.
Adequate internal control system safeguard business assets, in absence of it, assets of the
company may be stolen, misused or accidentally destroyed.
Internal control system within organization is necessary to discourage and stop non
performing business activities and to protect business from wastage is all aspects of the
business.
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Internal control system insures that rules and procedures are to be followed by business
personnel.
Management decision to choose cost effective control system may reduce the effectiveness
of internal control system.
There are chances of misuse by a person of authority who is operating on internal control
system.
Cash − Here, internal control is applied over payments and receipts of an organization. This
is to safeguard from misappropriation of cash.
Control over Sale and Purchase − With proper and efficient control system for
transactions regarding purchase and sale of material, handling of material and accounting
for the same is must.
Financial Control − It deals with the efficient system of accounting, recording and
supervision.
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Capital Expenditure − Internal control system ensures the proper sanction of capital
expenditure and also the use of it for the purpose intended.
Inventory Control − It covers the proper handling of inventory, minimization of slow moving
items or dead stock, proper valuation of stock, recording of it, etc.
Control over Investments − internal control system is applied to the proper recording of
transactions be it purchases, additions, sale or redemption, income on investments, profit or
loss on investment.
Reviewing the system of accounting entries, whether recorded as per accounting standard
or not.
To review existence of internal audit program and to check the efficiency of internal control
system.
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