Internal Control

Q.1 What do you understand by internal control?
Ans Meaning: - Internal control refers to controlling all functions/activities of a business in such a way so as to ensure:-
- Maximizing profit
- Smooth conduct of business
- Reduce possibilities of errors, frauds, embezzlements.
- Easy rectification on detection.
According to W.W. Bigg Internal control is best regarded as indicating whole spectrum of control, financial or otherwise established for the conduct of business including internal check, internal audit and other forms of control
Objective:-
(i) Correct accounting of transaction
(ii) Prevention of errors, frauds.
(iii)Fixing responsibilities/creating responsibility centers.
(iv) Safety of assets.
(v) Efficient utilization of all resources
(vi) overall improvement in performance/Internal Control can be divided in to :-
(1) Internal check
(2) Internal audit

Q.2 Explain in brief Internal Checking & Internal Audit.
Ans Internal check: - Under internal check, accounting of each transaction is divided in two different segments and accounting of each segment is performed by a different person. Hence, accounting activity of each transaction passes through several hands and work done by one man is examined by second and the work of second by third person in an automatic way. As per "De Paula" -An internal check means practically a Continues internal audit carried on by the staff itself by means of which work of each individual is independently checked by other members of staff."
Objects of Internal check /Advantages :
(i) Prevention of errors and frauds.
(ii) Easy discovery of errors and fraud & their timely rectification.
(iii) Easy fixing responsibility of each staff member
(iv) Ensuring correct recording /accounting of transactions
(v) Facilitating :
- Fast preparation of final accounts
- Smooth audit.
(vi) Making employees cautious and honest.
Limitations/ Disadvantages.
(i) System is expensive as more staff is required.
(ii) Fraud’s through collusion of staff are possible
(iii) If auditor relies more on internal check, test checks, the quality of audit may become unsatisfactory.
(iv) Owners may become careless.
If internal, check system is adopted with due care and diligence and periodically reviewed, above limitation of internal check can be overcome easily.
Internal Audit:- It is audit by internal staff of organization “Internal auditing is the independent appraisal activity within an organization for the review of accounting, financial and other operations as the basis for productive and constructive services to management .In is conducted by regular employees of a business concern” This audit has to ensure that there are proper arrangements for accounting and security of assets.
In case of large scale enterprises, such internal audit has become almost a necessity by a qualified auditor .The companies Act also provide that audit has to make a mention in his audit report whether proper arrangements were there for internal audit in case of big companies with paid up share capital of Rs. 25 lakhs and more. So govt. also wants to promote internal audit. Objects :-
(i) To check/ensure that internal check arrangements are working properly.
(ii) Discovering errors/frauds and preventing their recurrence.
(iii) Facilitate statutory audit.
(vi) Reviewing systems and procedures and suggest improvements in them.
(v ) Reviewing performance of employees departments, internal check arrangement and to offer suggestions.
(vi) To work as an aid to management to make the organization efficient and effective.



Q.3 Explain in brief internal check system to the followed for purchases, credit sales, cash receipts/payments; wages/salaries.
Ans Internal Check System for Purchase: - The main responsibility is with purchase department which has to ensure:
- Purchase of goods of best quality
- At lowest possible price
- Error free recording of purchases
In addition to purchase dept, other departments involved are:
- Stores dept.
- Material Inspection Dept.
- Accounts Dept.
Following Process are there regarding purchased
(i) Estimation of requirement of Goods to be purchased
- Store keeper collect requisition of purchase from different departments
- Compiles the requirements
- Assess total quality of diff errant goods to be purchased
- Placing purchase requisition to purchase dept.
(ii) Placing orders for supply of Goods :-
Main responsibility is that of purchase dept. Before placing order, it has to:-
- Get quotations from different suppliers
- Compilation of rates.
- Checking of rates and quality of goods
- Approval of quotations
- Placing order as per requisition slips received from stores dept.
(iii)Receiving of Goods :- When ordered goods are received ,following steps are to be taken.
- Entry in goods inwards book on main gate.


- Sending the goods to stores where goods are checked (counting, measuring, weight etc.)
- Stores dept. prepares goods received note and sends it to purchase dept. and to accounts dept.
(iv) Checking the invoice and making payment: - The accounts dept would check order placed, good receipt note, check prices in invoice and finally on reconciliation of all these documents, make payment and records the transaction in purchase book.
In this whole process following departments are involved which are performing specific functions regarding purchases.
- Preparation of requisition slips by heads of all depts.
- Taking quotations for supply by purchase dept.-placing order.
- Receipt and inspection of goods by stores dept.
- Passing of invoices after checking by accounts dept.
- Making payment to suppliers another officer in accounts dept. is involved
In case above system of internal check is followed, there are very less chances of errors & fraud’s in making purchase.
Internal Check regarding Credit Sales
(i) Receiving sales order:- orders are received in sales dept. they should be recorded in order received book in which particulars of order i.e date of order, quantity of goods, customer’s name etc. are recorded. After approval of officer of sales dept., two copies of order are prepared and one copy sent to dispatch dept.
(ii) Dispatch of Goods:- On receiving copy of order , officer in charge of this dept. issues instructions for collecting packing and dispatching goods with a copy to stores dept. for necessary action. Stores dept. makes available goods to dispatch dept. which adds its packing /dispatch cost in the copy of order which is sent to Invoice clerk.
(iii)Dispatch of invoice :- Invoice clerk prepares invoice in 3 copies out of which original copy is sent to costumer, one copy to sales dept. and one to accounts dept.

(iv) Accounts of sales & receiving payment :- This transaction is recoded in sales book as per invoice in accounts dept. This sales book is not maintained in sales dept. Amount to be received is handled by another officer.
Store officer/clerk of sales dept. dispatch stores and accounts dept. is involved who work in such a way that chances of any error/fraud are minimized.
In the same way, treatment of sales return from customer is accounted
Separate staff gets information of sales return, preparation of credit note and accounting entries of credit not issued.
Internal check regarding cash receipts/payment
Cash Receipts -
General Principles:-
- Handling of cash and maintenance of cash book by two different persons.
- Cash received through mail/post in the form of cash/cheques /D.D/ bill of exchange should recorded in mail Receipt Register and instruments should be crossed immediately.
- Cash received should be recorded in cash book the same day.
- Cash receipts should be acknowledged by a printed receipts to be signed by authorized officer.
- Un used receipt books should be kept safe in the custody of senior officer
- For reconciling cash with bank, bank reconciliation statement should be prepared frequently.
Cash Payments:-
- Cashier should not have power of sanctioning payment even of small amount.
- All cash payments should be properly authorized.
- All payments be made by cheque as far as possible and cheque signing authority should be different.
- Cheque issued should always be crossed.
- For petty cash payment, a separate petty cash book needs to be maintained.

Payment of Wages/Salaries:
Internal check system with regard to payment of salary and wages should ensure that:-
- Salary & wages which are due have been paid
- Proper record of attendance/time has been prepared.
- Payment has been made as per rates decided.
- No unauthorized deduction has been made from the salary/wages
- Acknowledgement by the receiver is there.
- In case of payment to another person, proper authority of the original person should be there.
- Proper account of advance payment need to be kept.
- Separate account need to be kept for salaries and wages as accounting heads would be different .This is more relevant when cost accounts are prepared.