- Pages: 9
- Word count: 2209
- Category: Employment
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i. INTERNAL CONTROL MEANING AND DEFINITION
THE COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ENGLAND AND WALES “ the whole system of control financial and otherwise, established by the management in order to carry on the business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records.” It is the whole system of controls established by the management for the proper conduct of the various activities of the business with the help of – Accounting control Quality control Work standard Budgetary control Periodic reporting Internal check Internal audit Policy appraisals Quantitative control
FUNDAMENTAL PRINCIPLES OF INTERNAL CONTROL
1. The work should be so divided between persons in such a way that the work done by one person is automatically checked by the other. 2. The collusion between one person doing a work and the other person doing work should be avoided. 3. The clerk in charge of journal shouldn’t have access to ledger or vice versa. 4. The work of the staff should be changed from time to time.
MEANING OF INTERNAL CHECK
The system is based on the principle of division of work or labour that is the performance of each individual in an organisation, is checked automatically, by another and the chances of occurrence of errors or those of their remaining undetected are greatly reduced. SPICER and PEGLER “internal check is an arrangement of staff duties whereby no one person is allowed to carry through and record every aspect of a transaction so that, without collusion between two or more persons, fraud is prevented and at the same time possibilities of errors are reduced to a minimum.”
OBJECTS OF INTERNAL CHECK
To eliminate and detect the acts of fraud and error. To prevent the misappropriation of cash or goods. To exercise moral pressure over the staff members. Since the work is divided into small units, it Increases accountability and responsibilities of the employees. 5. The system enjoys proper division of work and also the work of employees can be changed from time to time. 6. If an enterprise is operating an effective system of internal check, its books, accounts and other records can be readily relied upon. So the auditor can go for selective checking instead of detailed checking. 7. Preparation of final accounts is easily prepare able.
INTERNAL CHECK WITH REGARD TO WAGES
1. Maintenance of wage records – a. Time record Normally the workers are paid on the basis of time spent, thus the time period should be recorded. The following guidelines should be followed – o A separate wage department should be set up under responsible officers. o For every worker, a separate card should be maintained. For the recording the time following methods are used – o Time recording clock – when the worker enters and exits from the gate, they are required to insert his card on the slot of the clock in order to record the time. o Punching machine – each worker will be provided with a card containing his name, department, identity number, etc and they are required to punch the card while entering and leaving. o Attendance registers – under this system every employee is required to put his signature before a specified time in the morning and after a specified time in the evening. The main intention to is ensure that the workers are in the office during the office hours. o Computer – an identity card is provided to every employee of the firm. They are required to sweep the card in the computer controlled machine while entry and exit. b. Piece work record Under this system wages are paid according to the actual performance of the employees. The actual work done by a worker should be recorded in a card, countersigned by the foreman and stores keeper, which will ultimately be spent to quality control. Overtime record – under ordinary conditions, no employee should be allowed for over time, until and unless authorised by a authorised person. An overtime slip will be provided to the employees in which details regarding the name, address, extra time worked should be recorded, which will be counter signed by the fore man, works man and sent to the time keeper for verification.
Pass out records – no employee should be allowed to leave the factory until it is very urgent. Under this situation the foreman should provide a pass for exit with reason and time specified. 2. Preparation of wage sheet – The wage sheet should be prepared by a separate department from the information collected from the time keeper, fore man, works cost, etc. The following details should be presented in the wage sheet – o Name and the identity number of the employee. o Number of hours worked including over time. o Department o Wages, bonus, gratuity, HRA, etc payable. o Other deduction o Net payable Preparation of wage sheet is done by five employee – o Two clerks should consolidate the information from wage record. o The third clerk should record the personal information and total time worked for. o The fourth clerk should calculate the gross and net wages of the worker. o The fifth worker should check the whole process. 3. Payment of wages The wage sheet should be handed over to the cashier, who is no way connected to the preparation of wage sheet. The cashier should withdraw the required amount under the name of “wages”. The following procedure should be borne in mind – The cashier shouldn’t be connected with preparation of the wage sheet. The wages should be paid only in the physical presence of the employees. The foreman should be present during the payment of the wages in order to avoid duplication. Proper precautions should be taken for unclaimed wages.
INTERNAL CHECK WITH REGARD TO CASH SALES
1. Sales over the counter – Separate salesman should be appointed to look after every counter. Each salesman is given sales memo book with different colour. The salesman man at the counter should prepare four memos. These memos should be checked by another officer. Once the payment is made by the customer to the cashier one memo should be duly stamped as “cash paid”. One copy of it should be retained for the preparation of sales summary. Other two should be retained by the cashier. The cashier should record the day’s total sales in the cash and sales books at the end of the day. The cash received, total sales should be sent to the officer in charge.
2. Postal sales A separate register should be maintained in which all details for sales and sales returned made by VPP must be made. The total receipts and advances received from VVPs order should be recorded in separate book. The VVP register should be thoroughly checked by a senior officer. 3. Sales by travelling agent – Travelling agents should be allowed to issue only rough receipts to the customers for the cash received from the customers. The final receipt should be issued by the head office only. The travelling agent should deposit the cash received from the customers on a daily basis. The salesman shouldn’t be allowed to deduct any commission, bonus, salary or daily expenses from the cash received from the customers. The head office should maintain a list of debtors and send remainder to the customers on a regular basis. The agents shouldn’t be allowed to work for a long time at any particular place, since it will improve efficiency and minimize frauds.
INTERNAL CHECK WITH REGARD TO CASH PURCHASES
For effective purchase in terms of both quality and price a firm should divide its activities into the following departments – Requisition – the department requiring supplies or asset must send a requisition to the purchase department, which should be recorded both in the respective department and purchase department. The details and specification of the goods should be mention along with the required date of delivery. Purchase order – the purchase department should invite for open tenders from approved suppliers and senior officers. The purchases department should prepare four copies of purchase order. One copy will be sent to the vendor, second to the stores and third to the accounting department. Receipt of goods – on the receipt of goods the purchase department should check the quality, quantity and other specification of the goods ordered and the same should be recorded in the inward book. Then the goods should be dispatched to the concerned department, after prior notice to the department head. Invoice – the purchase department should compare the invoice with the purchase order. If satisfied then send to the accounting department. If there is no irregularities then account for it in the books. Make note of returns
INTERNAL CHECK IN DEPARTMENTAL STORES
1. Location of store – The stores should be located at a convenient place and considering the distance between stores and the production department.
There should be proper mechanism for the, to avoid misplacement, misuse or wastage. 2. Receipt of goods – On receiving goods the department should prepare three copies of “goods received note”. One to purchase department, one to accounts department and the last for the department itself. All details regarding the goods should be mentioned in the copies. 3. Preservation of stores – Everything has a place and everything in a place. Each product should be provided with a code to avoid unauthorised usage or purchase. Bin card should be prepared. The goods should be frequently checked and the status should be updated. Comparison of stores items. 4. Issue of stores – The issue of goods should be undertaken by an individual or a authorised person only. The issue of goods should be done only against request slips only.
The slips should be sent to the accountant. Different department should be allotted with different colour. The gate keeper should be instructed not to allow any goods out of the stores without proper slips and notes and along with this he should prepare a ledger of the flow of goods. 5. Recording – A separate accountant should be appointed to keep a record of the stock, who is in no way related to the receipts or issue of stores. All the entry should be done on the basis of notes, slips, etc. The bin cards should be checked from time to time.
MEANING OF INTERNAL AUDIT
THE INSTITUTE OF INTERNAL AUDITORS U.S.A “internal auditing is an independent appraisal activity within an organisation for the review of operations as a service to management. It is a managerial control which functions by measuring and evaluating the effectiveness of other controls.” Internal
audit is done not only to detect the clerical errors but also to appraise the various operational functions, to evaluate the quality or performance of various persons doing the assigned responsibilities. It is a post transaction review undertaken by the top level of management.
x. IMPORTANCE OF INTERNAL AUDIT
1. To verify the correctness, accuracy and authenticity of financial accounting and statistical records presented to the management. 2. To confirm that the liabilities have been incurred by the organisation in respect of its valid and legitimate activities. 3. To comment on the effectiveness of the internal control system and the internal check system inn force and to suggest ways and means to improve these system. 4. To facilitate the early detection and prevention of frauds. 5. To examine the protection afforded to company assets and the uses to which they are put to. 6. To ensure that standard accounting practices which have to be followed by organisation are strictly adhered to. 7. To identify the authorities for purchasing assets and other items as well as disposal of assets. 8. To undertake special investigation for the management. 9. To assist management in achieving the most efficient administration techniques and procedures, by optimum utilisation of resources. 10. Increase reliability and integrity of information, for better decision making.
MERITS OF INTERNAL AUDIT
1. It will have a continuous check on the accounting records and the accounting staff will be alert. 2. Errors and frauds are detected quickly and the books of accounts will be free from any errors. 3. It facilitates the finalisation of accounts easily at the close of the financial year. 4. Business activities are reviewed at regular interval and updated to the management. 5. It helps in the adoption of standard accounting policies and practices in the firm. 6. It determines the efficiency of internal control and internal check.
DEMERITS OF INTERNAL AUDIT
1. Excessive Internal audit may result in de-motivation of employees. 2. It is expenses in terms of time and resource. 3. There are possibilities of alteration of facts and figures after the internal audit has been conducted. 4. Only internal parties are benefited from the reports of the internal auditors. 5. Most of the times internal audit is conducted by un-qualified personals.