The internal control system includes all the strategies, policies and procedures adopted or instituted by the management of an entity to assist in their objective achieving as far as practicable, the orderly and efficient conduct of the business and includes adherence and compliance to management policies and applicable laws and regulations; the safeguarding of assets; the prevention and detection of fraud and error, the accuracy, reliability and completeness of the accounting records; the timely preparation of reliable financial information; and the evaluation of the operating performance and efficiency of the organization. OBJECTIVES OF INTERNAL CONTROLS
To provide reasonable assurance to management and external users/auditors that: I) Safeguarding of assets- Assets are safeguarded and used for business purpose. Internal control can safeguard assets by preventing theft, fraud, misuse or misplacement. One of the most serious breaches of internal control is employee fraud. Employee fraud is the intentional act of deceiving an employer for personal gain. Such deception may range from purposely overstating expenses on a travel expense report in order to receive higher reimbursement embezzling millions of dollars through complex schemes. II) Business information is reliable and accurate- Authorizing, recording and safeguarding are related to establishing the system of accountability and are aimed at the prevention of errors and irregularities. Reconciliation and valuation are aimed at detecting errors and irregularities. Prevention and detection of errors and irregularities provides reasonable assurance to managers and external auditors that accounting records are properly maintained and financial reports or information are reliably and accurately produced for the business and publication. Accurate business information is necessary for operating a business successfully. The safeguarding of assets and accurate information often go hand-in-hand. The reason is that employees attempting to defraud a business will also need to adjust the accounting records in order to hide the fraud. III) That laws and regulations are complied with- Businesses must comply with applicable laws, regulations and financial reporting standards [particularly if the financial statements are in compliance with the IAS]. Examples of such standards and laws include environmental regulations, contract terms, safety regulations, and generally accepted accounting principles (GAAP). IV) One final objective of internal control is to promote operating efficiency to achieve the desired goals of the business.
PRINCIPLES OF INTERNAL CONTROL:
1.Adequate separation of duties
2. Proper authorization of transactions and activities
3.Adequate documents and records
4. Physical control over assets and records
5.Independent internal verification
6.Establishing responsibility for certain task
1. Adequate Separation of Duties
Segregation of duties- all work in an organization or a department is divided up so that no one person has control over every aspect of the operation especially for related functions. It is generally thought that the person who keeps the records about an asset (cash, receivables or inventory) should be separate from the person who has physical custody of the asset. Since more than one person is involved in an operation, the second or third person can serve to check on the work of the other employee. Examples of separation of duties: One individual should not handle cash receipts and indicate which accounts receivable should be written off as uncollectible. One individual should not authorize payment of an invoice and also sign the cheque to pay that invoice. There are three general guidelines for separation of duties to prevent both intentional and unintentional misstatements. •Separation of the custody of assets from accounting
The reason for not permitting the person who has temporary...