Rajarshi Shahu Mahavidyalaya, Latur (Autonomous)

Department Of Commerce
Auditing I
B.Com III (Sem V)
By Miss. S. N. Bagwan
M.Com, NET, SET.

III. Internal Control, Internal Check and Audit control

❖ Internal Control
Internal system comprises the whole system of control adopted by the management in
order to carry out the business in an efficient manner.

It includes internal check, internal audit, and all other controlling system adopted by
the management. Internal control system assures the management that the information it
receives is both reliable and accurate. The system also helps to ensure that the assets are secure
and management policy is being followed properly.

Effective adaptation of internal control system not only guarantees management about
the reliability of accounting information but it may also help an independent auditor to rely on
the system of internal control in determining the timing, nature, and extent of the audit work.

➢ Definition of Internal Control

1. The American institute of certified public accountants (AICPA)
“The plan of organisation and all the co-ordinate methods and measures adopted within
a business to safeguard its asset, check the accuracy and the reliability of its accounting data,
promote operational efficiency and encourage adherence to prescribed managerial policies. A
system of internal control extends beyond those matters which relate directly to the functions
of accounting and financial departments”.

2. The Institute of Chartered Accountants of England and Wales (ICAEW)

“Internal control means not only internal check or internal audit, but the whole system
of control, financial and otherwise, established by the management in order to carry on the

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business of the company in an orderly manner, safeguard its assets and Secure as far as possible
accuracy and reliability of its records”.

From the above two definitions it is clear that internal control is a broad term with a
wide area of operation. It includes a number of methods and measures, which are exercised by
the management to ensure smooth and economic functioning of business entity. It assist the
management in the performance of various functions. Internal control facilitates the external
audit also as it assures the external auditors that the information supplied to them is reliable.

➢ Objectives of Internal Control

The internal control system aims at providing reasonable assurance about following
points;

1. Records are valid, complete and accurate.

2. Recorded transactions are duly authorised.
3. Transactions are properly classified and valued.
4. Transactions are recorded at a proper time.
5. Transactions are properly posted to the ledger accounts, and correctly summarised.

➢ Review of Internal Control

There are four different methods or techniques for taking a review or evaluating the
system of internal control.

1. Oral Approach
Oral discussion is held to identify strength and weaknesses of internal control system
operated in an organisation.

2. Memorandum Approach
At the time of discussion full notes are taken for evaluating the system of internal
control. Analysis of weaknesses is undertaken and suggestions are offered through
management letter for improvement.

At the conclusion of review of the internal control system, many audit firms send their
client a letter- referred to as management letter. This is also known as weakness letter. The
objectives of this latter are;

a. To identify any weaknesses in the internal control,

b. To suggest adequate accounting control,

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 c. To suggest improvements in existing internal control.

A management letter is a report issued by the auditor. Therefore, it should receive the
same degree of care and consideration accorded to report expressing and opinion on the
financial statements. However, there is no prescribed form of the above letter. Major aspects
may be included in the letter and minor weaknesses may be relegated to an annexure.

3. Internal Control Questionnaire (ICQ)

An internal control questionnaire consist of questions in respect of each element of
business. Answers are obtained as ‘yes’, ‘no', ‘not applicable’. Remarks column is used for
raising questions and/or to identify weaknesses of the existing internal control with a view to
remove these weaknesses. Some firms use improved and expanded version of internal control
questionnaire. This is known as Descriptive System Questionnaire (DSQ).

4. Flow Charts
A flow chart is a graphic representation of a system in use. It provides information
about the various operations, control measures, and steps included in a system through graphic
symbols. A flow chart, therefore, provides a simple concise, and comprehensive view of what
is happening within the organisation. It explains what documents or information are raised,
how they are dealt with, what the circulation of cash or goods is, what actions are taken, etc.
Flow chart of each business activity are reviewed and internal controls are evaluated.

❖ Internal Check
Internal check refers to such an arrangement of bookkeeping routine that errors and
frauds are likely to be prevented or discovered at the time of bookkeeping itself. It is something
inherent in the accounting system and it differs from internal audit because the internal audit is
applied by the companies own employees after entries are completed , where as internal check
operates at the moment when the entries are made.

➢ Definition of Internal Check

1. Spicer and Peglar
“A system of internal check is an arrangement of staff duties where by no one person
is allowed to carry through and record every aspect of a transaction so that, without collusion
between two or more persons, frauds is prevented and at the same time, the possibility of errors
are reduced to a minimum”.

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 2. De Paula
“An internal check means practically a continuous internal audit carried on by the staff
itself, by means of which the work of each individual is independently checked by other
members of the staff".

➢ Objectives of Internal Check

An effective system of internal check aims to achieve following objectives;

1. Proper Division of Work

Division of work based on each individual’s ability, training, and specialisation leads
to an overall efficiency and effectiveness. At the same time, the object of proper staff
development through appropriate and timely change of work is also accomplished.

2. Fixation of Responsibility
The total work is divided into smaller units such that it can be precisely defined and
responsibility for the same fixed on individual workers. Due to clear determination of
responsibility, each member of the staff knows what is expected from him, and also that for
any error or fraud or originating or going undetected at his end, he alone will be held
responsible.

3. Minimization of Errors and Frauds

As the work performed by each individual or department is in the ordinary course
checked by another individual or department, there is an effective check on the tendency to be
careless or dishonest at one’s work. As a result, there is a considerable reduction in the
incidence of errors and frauds.

4. Early Detection of Errors and Frauds

Because of an independent checking of each individual’s work by another, any error or
fraud or committed by any employee is likely to be discovered in time by another, such that
the resultant loss to the enterprise is minimised.

5. Reliability of Books of Accounts

If an enterprise is operating an effective system of internal check, its books of account
and other records are readily relied upon by interested parties. In such a case, even the statutory
auditor confines his examination to selective test-checking, thus avoiding the need to undertake
a detailed examination of each and every transaction.

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 6. Early Preparation of Final Accounts
Accounting data emanating under an effective system of internal check can safely be
used to prepare final accounts of the business in time.

❖ Audit Control
An Audit control is an exercise to ensure that the audit plan is actually carried out in
the lines it is made. So that, we can modify our audit plan as per real life situations with
inclusion of corrective plans.

The auditor exercises the control over his assistants, coordinates the work by his
interactions with the client, other experts involved in the business of the client and also related
to his audit work and subsequently taking note of the progress of the work. Simultaneously,
the auditor builds up proper files of the audit matters and events to create the documentation
for his plans and actions.

➢ Audit Control over Assistants

The auditor exercised his control over the assistants with the following objectives:

a. The audit work is performed by the assistants as per programme,

b. The work is progressing as per time schedule,
c. To provide necessary training and instructions to the assistants in carrying out the work,
d. To appreciate the practical difficulties in actual performance of work and to provide
remedial actions,
e. To update the audit program in the light of new experiences narrated by the audit
assistants,
f. To decide on important matters involving his expert knowledge or concerning his
responsibilities.

The control over the assistance is exercised by asking them to meet the auditor at
periodical intervals. Generally weekly reporting of assistants at the auditors of office is
organised. The assistants are required to maintain diary of work performed by them during the
week. Their diary sheets are checked by the auditor. The auditor conducts the meeting,
discussion with the assistants and review their work for correction and guidance. Sometimes
the auditor can also make surprise visit to the client’s office to obtain first -hand information
about the actual performance of the assistants.

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 ➢ Audit control over the work performed by others
At the time of performing an audit work auditor often use the information which is
generated by other person. There are many circumstances during audit where the auditor needs
the opinion and knowledge of an expert persons.

As the auditor exercised supervisory control over the audit assistants the same control
cannot be possible in case of experts, because it depends upon the appointment of experts

Sometimes the experts may be appointed by the client and sometimes by an auditor.
So, as a result to have the control over the work performed by the expert person and auditor
should communicate the with the expert person about the area of their operation, and their
assumptions and the methodology of their work.

At the end auditor has to rely on the work performed by the expert persons auditor
should confirm himself about the expertise, knowledge, and competencies of an expert person.

If an auditor is agreed with the opinion of an expert then and then only he should use
that information at the time of presenting audit report. If an auditor does not agree with the
opinion of expert he can take the help of other expert person or can communicate the same with
the client.

➢ Coordinating the work of other auditors

The auditor has to rely on the work performed by other auditor in certain circumstances.

Specially in case of joint audit branch Audit and internal audit.

In case of joint audit more than one auditor are appointed. The auditor’s have to plan
division of work among them. The work may be divided according to units of operation or
areas of checking. Where the auditor’s have agreed to have division of audit according to units
of operation, each auditor has to control the audit work of the unit which has been allotted to
him. Many times joint auditors make joint report. It is a professional obligation that is auditor
must bring to the notice of auditors any matter observed by him which may have significant
bearing on the truth and fairness of financial information.

In case of branch audit, the statutory auditor is entitled to regard the branch auditor as
an expert in respect of branch audit. As such, he is entitled to rely the work of expert-branch
auditor. However, the statutory auditor has right to visit branch, make enquiry, and have access

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to records of the branch. The statutory auditor must plan to have a good liaison with branch
auditors to ensure that the degree of reliance on the branch audit is high.

Where the entity has internal audit conducted by other auditor, the statutory auditor
must evaluate the efficiency of internal auditor. The statutory auditor must plan to take
advantage of the work of internal auditor at the time of arranging his audit programme, manner,
and extent of checking, that the duplication is avoided.

➢ Quality Control for Audit Work

AAS 17 establishes audit standards on the quality control policies and procedures. The
standards deals with-

a. Quality control policy and procedures of an audit firm regarding audit work generally,
b. Quality control procedures regarding the work delegated to assistant on an individual
audit.

The audit firm should implement the quality control policies and procedures designed
to ensure that all audits are conducted in accordance with Auditing and Assurance Standards
in relation to the audit generally.

➢ Objectives of Quality Control for Audit Work

1. Professional requirements
All the person is related to audit work should adhere to the principles of Independence,
integrity, objectivity, confidentiality, and professional behaviour. A culture of professional
behaviour must prevail in the audit firm. The professional behaviour is a word f wider
significance and it would require personnel to maintain a high degree of moral, ethical, and
work standards, whether in or about or away the work

2. Skill and competence

Audit staff must acquire skills and competence to perform the duties of auditor.

3. Assignment
Audit work is to be assigned to the personnel who have the required technical training
and proficiency required in the circumstances.

4. Delegation
A delegation must be spirited in the sense that there must be sufficient direction,
supervision, and review of the work delegated to ensure quality standards.

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 5. Consultation
The auditor should have arrangements for access for the consultation within and outside
the firm with those who have appropriate expertise.

6. Acceptance and retention of a client

Decision as to accept a prospective Client or retain an existing clients should be based
on the considerations like the firm’s Independence and the ability of the form to solve the client
properly.

7. Monitoring
The audit firm should ensure that quality control policy, procedures are continued to be
monitored for the adequacy and effectiveness in their implementation.

➢ Quality Control in an Individual Audit

1. Staff Deployment
The auditor should ensure that the delegation of work to the assistants is done after
considering the professional requirements of the work and the professional skills of the audit
staff.

2. Direction of Work Delegated

Direction involves in leading mentally audit assistants to the work situations with a
prior sense of how and when to do audit procedures.

The direction is conveyed to the audit people at work through audit programme, overall
audit plan and time budget.

3. Supervision
Supervision by the auditor is a link exercise between direction and review. The auditor
cannot wait to find that things had gone away at a review stage. If he finds that the directions
are misunderstood or disregarded by the staff, he could use the exercise of supervision to set
things correctly at a possible earliest opportune time or to modify the set of directions to address
appropriately to the need of the situations. It is a tool to ensure that audit programming is
followed correctly.

4. Review
The review is the final stage of a quality testing process of audit work. But it does not
mean that it is finally done.

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 The person who should review the what should be the person who has competence at
least equal to the competence of the person who performed the work. That is review of work
of a junior audit clerk is done by senior clerk and so on..

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