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Please create 20 multiple choice questions from this chapter “ Internal control is a process for assuring achievement of an organization’s Objectives in operational effectiveness and efficiency, reliable financial Reporting and compliance with laws, regulations and policies. Meaning Internal con...

Please create 20 multiple choice questions from this chapter “ Internal control is a process for assuring achievement of an organization’s Objectives in operational effectiveness and efficiency, reliable financial Reporting and compliance with laws, regulations and policies. Meaning Internal control refers to the various methods and procedures adopted for the Control of production, distribution and the whole system (financial and non- Financial) of the enterprise. Internal control is a broad term which is normally used to control financial and Non-financial activities. It involves a number of checks and controls exercised In a business to ensure efficient and economic working. In other words, internal control system – the whole system of controls financial Or otherwise, established by the management in order to carry on the business Of the enterprise in an orderly and efficient manner- ensures adherence to Management policies, safeguards the assets and secures as far as possible the Completeness and accuracy of the records. Definition of Internal Control According to W.W.Bigg “Internal control is best regarded as indicating the Whole system of controls, financial and otherwise, established by the Management in the conduct of a business, including internal check, internal Audit and other forms of ControlAmerican Institute of Certified Public Accountants defines “Internal control Comprises the plan of organization and all the co-ordinated methods and Measures adopted with in a business to safeguard its assets. Check the accuracy And reliability of its accounting data, promote operational efficiency and Encourage adherence to prescribed managerial policies”. Basic/ Fundamental / Essential Elements of Internal Control A system of internal control will have the following features or characteristics. 1. Plan of organization. 2. Authorization, recording and control procedures. 3. Sound practice in performance of functions. 4. Competency of personnel. 1. Plan of organization: It should establish clear line of duties, Responsibilities, segregation of operations, and subordination of each Member of the staff. Organization structure must provide for adequate Independence for various functions performed at different levels. The Division of duties should be such that activities of a department are Controlled by records maintained outside it. 2. Authorization, recording and control procedures: They should ensure That (a) Every item of expenditure has been properly authorized and accounted For. (b) Every item of receipt has in fact been received and accounted for. (c) There is proper custody of the funds and assets. (d) There is no misapplication or misuse of any property of the enterprise. 3. Sound practice in performance of functions: An effective system of Internal check should lie down that no single person should alone handle Any transaction completely from beginning to end. The system should Provide that the work of one person will be checked by another, the Management shall be able to detect errors and frauds. 4. Competency of personnel: It means the competency of departmental Heads, key personnel and all persons performing routine tasks at different Levels. This will require proper selection, training, effective direction, Supervision and control, quick corrective action to avoid violation of Prescribed procedures Duties of Auditors regarding Internal Control The auditor’s duties regarding internal control are as follows: 1. To assess the adequacy of the accounting system as a basis for preparing The financial statement. 2. To identify the types of potential misstatement that could occur in the Financial statement. 3. To consider the factors that affects the risks of misstatements. 4. To design appropriate audit procedure. The auditor should rely on internal controls only after ascertaining and Evaluating these controls. If the auditor has reasons to believe that a client has Set up a strong system of internal control, the reliance on that system will help The auditor to reduce the detailed checking which would otherwise be Undertaken. Objectives of Internal Control 1. Proper authorization: Transactions are executed with management’s general And specific authorization. 2. Prompt recording of transactions: All the transactions are promptly Recorded in the correct amount in the appropriate accounts and in the Accounting period in which they are executed so as to permit preparation of Financial information within a framework of recognized accounting policies And to maintain accountability of assets. 3. Restricted access to assets: Access to assets is permitted only in accordance With management’s authorization. 4. Actions against deviations: The recorded accountability for assets is Compared with the existing assets at reasonable intervals and appropriate Action is taken with regard to any differences. To minimize, if not completely eliminate, wastage and inefficiencies in Business operations and to safeguard the assets of the business. To ensure high degree of accuracy and reliability of accounting data and Promote operational efficiency. To measure how far the policies of the management are being Implemented.. To evaluate the efficiency of performance in all aspects of business Activities and to highlight the weaknesses. Principles of Internal Control An effective internal control system should have the following factors: 1. Competent and trust worthy staff: People in charge of internal control System must be reliable and highly competent about the work. Lack of Knowledge and dishonesty will spoil the efficiency of the system. 2. Records of financial and other organizational plans: A good internal Control system must have good documentation system. Filing, recording, Classifying etc. Will help in this regard. 3. Segregation of duties: Normally, there should be a separate department for Internal control this reduces frauds, bias etc. Normally a clerk in charge of Accounting function should not be in charge of assets also. 4. Supervision: Proper reviewing of the operations of the company regularly Makes the control system effective. 5. Authorization: All transactions must be properly authorized. In other Words, the authority of each person should be well defined. 6. Sound practices: The Company should have well established procedures, Policies, delegations, organizational manuals etc. 7. Internal Audit: It’s a part of internal control and it should be independent Of internal check. 8. Accounting Controls: Proper accounting information systems should be Established so that the information relating to accounts is properly Collected, recorded and accounts prepared. Advantages of Internal Control The various advantages that may be derived from internal control system are Summarized as follows: 1. Identification of defects: Under internal control system, the total activities Are segregated in such a way that the work performed by one employee is Automatically checked by another employee. So, if there is any defect in the System, it is easily detected. 2. Flexibility: In this system, year-wise comparative analysis is done, so, if There is any change in the mode of operation, the changes in the system can Easily be accommodated. Therefore, the opportunity for flexibility is Available. 3. Time savings: If the internal control system is in operation in an Organisation, there is no need for the preparation of separate audit Programmes for each and every audit engagement. Thus, it saves time to a Great extent. 4. Lesser risk of omission: Under this system, the total work is sub-divided Into a number of activities and each employee is assigned with a particular Type of activity. So, there is least chance of oversight or omission of any Matter. 5. Provision for training facility: Due to lack of adequate experience, the Auditor may face difficulty in establishing a close relationship between Audit programme and the internal control system. This system itself Provides training facilities to auditors to overcome this difficulty. Limitations of internal control 1. Cost: The management thinks that the cost of a control procedure must not Be in excess of potential loss due to error or frauds. 2. Transactions: The internal control tends to be directed an anticipated types Of transactions and not at unusual transactions. 3. Possibility of error: There is possibility of human error due to Carelessness, distraction, mistake of judgment or the misunderstanding of Instructions. 4. Circumstances: There may be collusion with parties outside the entity, Employees of the entity. Due to such collusion there is possibility of Circumvention of control. 5. Responsibility: There is a chance that a person responsible for exercising Control could abuse that responsibility, for example, a member of Management over riding a control. 6. Conditions: There is a possibility that procedure may become inadequate Due to changes in conditions and compliance with procedure may Deteriorate.