Internal Control Methods

INTERNAL CONTROL METHODS

 
A. LARGE SCALE BUSINESS:

1. NARRATIVE DESCRIPTION:
It is method of internal control. The auditor can know and record the internal control system. The information is collection and compiled in narrative form relating to accounting and administration. The observation and discussion with management on every aspect of business can be recorded. There must be some sort of procedure for recording the information. The system its number and operation with data can he recorded at the top of the page. Every operation can be stated sequence wise with number for future use and reference. The symbol may be used to make distinction between one work and another.

The identification of control is facilitated due to complete narration in the form.
The narrative description must be complied properly. The full details should be available. It should be cross - reference for future use. It should be understandable for subsequent audit. It becomes easy to identify controls with in the systems. The narrative description requires too much time. The information collection is very lengthy. There may be omission of relevant points.

2. QUESTIONNAIRE:
Internal control questionnaire is a method of recording information relating to administration and accounting. The purpose of description is to evaluate the internal control operating in the entity. The business work is divided in to functions or systems. Every function is examined through separate questionnaire. The questions are systematically arranged in order to test the internal controls. The auditor can put simple, to the point and short questions. The questions must be prepared after proper consideration. These can be arranged incompact from. The management may be asked to assure these questions in written form. The answer must be exact short and brief. The manager may be asked to fill in the internal control questionnaires in free time.

 
The questionnaires must be prepared department-wise or section-wise. The questionnaires may be handed over to departmental in charge for supply of desired information. The question may be circulating among all officers to fill in the relevant data. This method requires skill. The preparation of question is not so simple it needs training and experience. The questions must be relevant so that the whole desired information is available. The management likes this method to provide information. The facts behind books can be disclosed. The formation of questionnaire is easy as compared to narrative description. The collected information is analyzed and weaknesses are noted. There is no charge of over looking necessary information.

 
EXAMPLE:
The internal control questionnaire, relating to purchase, may include the following questions.
1. Is there separate purchase department?
2. Is all purchase orders placed in writing?
3. Does the purchase officer approve purchases requisitions?
4. Are there authority limits for purchase of goods?
5. Are purchase order serially numbered?
6. Are all goods received serially numbered?
7. Are arrangements made for inspection of goods?
8. Are entries made in goods inward book just after receipt of goods?
9. Are copies of goods inward bill given to purchasing accounting and store department?
10. Are documents prepared on the return of goods?
11. Are goods returned properly approved?
12. Are entries made in goods out ward book just after return of goods?
13. Are accounting and purchase departments informed on return of goods?
14. Are credit note received from the suppliers?
15. Are purchase bills, purchase order and purchase compared?
16. Are bills properly authorized for making payments?
17. Are invoice passed for payment duty stamped to check double payments?

 

FLOW CHART:
Flow charts are graphs, which show the movement of documents. The auditor can adopt this method to record internal control system. The flow chart show through graphs about systems working in the business. The existence and movement of documents is stated. The sequence and record of operations performed is depicted. The internal check working in the business is noted. Accounting procedure for many business aspects can be recorded. The flow chart can pinpoint the good and weak points of internal control system. The evaluation of internal control system becomes possible due to flow chart. It also provide in the function about accounting system.

The flow charts show the movement of documents arid information relating to space and time. The horizontal and vertical lines are used in the flow chart. The horizontal lines indicate flow in space while vertical lines indicates movement in time.

 
The name of the client is written on the top. The detail of the operation is stated. The initial of the export with date are also recorded on it. The left - hand side of the chart is expert is used to narrate the operation and their number. The remaining part can be used for departments and employees. The solid vertical line indicates the movement of a document. The broken horizontal lines can show the movement of information. The flow of information may include checking of one document with another preparation of documents from information recorded in another and posting to a ledger.

EXAMPLE:
The flow chart may contain the following symbols.
SYMBOL  EXPLANATION  EXAMPLE:
Document  Account book   Operation  Narration be given like Authorization
B. SMALL SCALE BUSINESS:
4. CHECK LIST

The minimum checklist is a list of questions like internal control questionnaire to record the system information relating to small business concern. When the size of the entity is small the number of functions are very few. When there is one manager, all the functions are performed by him. The increasing size of the business may require more managers. In this situation the work is distributed among these managers. The nature of work may relate to manufacture, trade or service. In case of manufacture raw material is processed to make final product. The trade is concerned with exchange of finished or semi-finished goods. The services business can provide services only.

 
The auditor must know the nature of activity carried on by the business management. The list of managerial staff may be collected. He can design the questions relating to the nature of work. The list of staff may be collected. He can prepare questions to collect the whole information. He can note the various control operation in the business. He can note the weakness in the system. The importance is given to supervision in small-scale business. The involvement of manager in day-to-day operation can compensate the necessity of many controls applicable in large business. Therefore minimum control checklist is developed to evaluate the working of business.

 
EXAMPLE:
The minimum checklist may be as under:
Are liabilities incurred for the purpose of business?
Are liabilities properly recorded in the books of accounts?
Are all order placed in writing?
Are purchase order serially numbered?
Are purchase order approved by the owner of partner?
Is there written evidence for receipt of goods?
Are goods received notes serially numbered?
Are goods received notes compared with purchase order copy?
Are suppliers invoice examined for calculations?
Are suppliers invoice approved by owner or partner?
Are purchases invoices balance regularly reconciled with suppliers bills?
Is owner or partner supervision effectively compensating Weakness in basic control

 

COMPARISON
VOUCHING   TRANSACTIONS  SUPPORTING EVIDENCES
INCOME STATEMENT  BALANCE SHEET  CASH FLOW STATEMENT
INTERNAL AUIDT  ACCOUNTING SYSTEM  INTERNATIONAL & OTHER  EXTERNAL AUDITOR
INTERNAL CONTROL SYSTEM

 Article Source: http://www.informationbible.com/article-internal-control-methods-112432.html

 Article Tags: internal control methods, internal control analysis

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