Internal Control

  • Post last modified:20 April 2021
  • Reading time:9 mins read
  • Post category:Finance
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What is Internal Control?

The plan of organization and all the methods & procedures adopted by the management of an entity to assist in achieving management’s objective of ensuring, as far as practicable,

i. Orderly & efficient conduct of the business
ii. Adherence to management policies
iii. Safeguarding of assets
iv. Prevention & detection of frauds & errors
v. Ensuring accuracy & completeness of the accounting records
vi. Timely preparation of reliable finance information

Usually the control is entirely centralized with the owner & there is no significant delegation of duties.

However as the business grows in size, it soon reaches a stage where the owner can no longer keep himself intimately informed about the detailed operations of his business in such a case internal control becomes very important.

The reliability of business operations can be judged by the effectiveness of internal control.

Objectives of Internal Control

  • Transactions are executed in accordance with management authorization.
  • All transactions are recorded with appropriate amount & in appropriate
  • account.
  • To prevent & detect frauds & errors.
  • To prevent the assets from unauthorized access, use.

Essentials of Good Internal Control System

  • Proper allocation of functional responsibilities within the organization.
  • The quality of the personnel is very important. They should be competent & honest.
  • Implementation of proper operating & accounting procedures to ensure accuracy & reliability.
  • The review of the work of one individual by another whereby the possibility of fraud or error in the absence of collusion is minimized.

Limitations of Internal Control

Due to some inherent limitations of internal control, objectives of internal control cannot be absolutely achieved. These limitations are as follows

  1. Many times control does not tend to be directed at transactions of unusual nature.
  1. Management’s consideration that control be cost-effective.

  2. The potential for human errors.

  3. The possibility that the person having higher authority may override a

  4. The possibility of deception of control through collusion with outside parties or with employees of the entity.

  5. The procedure may not work due to changes in conditions.

  6. Manipulation by the management in the preparation of financial

Review & Evaluation of Internal Control

Auditor can use the following tools to collect information required for the proper review & evaluation of internal control:

Narrative Record

  • It is complete & exhaustive description of the system as found in operation by the auditor.

  • Actual testing & observation are necessary before such a record can be developed. It is suitable for small businesses.

  • But it is difficult to understand the actual system.

  • There is a weakness or gap in the internal control system cannot be easily identified.

Check List

  • This is a series of instruction or questions which a member of the auditing staff must follow & answer.

  • Answers to the checklist instructions are usually Yes, No or Not Applicable.

  • The auditor should study the complete checklist to ascertain the existence of internal control & evaluate its implementation & efficiency.

Internal Control Questionnaire

  • Internal Control Questionnaire is a set of questions designed to provide a thorough view of the state of internal control in an organization.

  • It contents the questions relating to:
  1. Purchases & Creditors
  2. Sales & Debtors
  3. Stocks
  4. Cash & Bank Receipts & Payments
  5. Fixed Assets etc

The purpose of ICQ are:

  • Identifying Weaknesses: Weakness in the Internal Control System can be known by examining answers to the questions in the ICQ.

  • Extent of checking: ICQ analysis enables the auditor to decide the extent & depth of checking required in accounting areas & can pursue his work more objectively.

  • Proper Sampling: ICQ analysis helps the auditor to select samples in a rational manner. He can adopt a more detailed checking in weak control areas.

  • Audit Planning: The audit programme can be modified if required. The programme can be tailor-made to the needs of specific situations.


  • It is a graphical presentation of each part of the company’s system internal control.

  • It is the most concise way of recording the auditor’s review of the system.

  • It minimizes the amount of narrative explanation & thereby achieves a consideration or presentation not possible in any other form.

  • It can be easily spotted & improvements can be suggested.

Elements of internal control

Internal control systems operate at different levels of effectiveness. Following are some elements of the internal control system:

Control Environment

The control environment relates to the control consciousness of the people within the organization. The control environment is the basis for all other components of internal control.

Risk Assessment

Risk Assessment refers to the organization’s identification, analysis, and management of the risks that are related to the preparation of financial statement, in order to ensure that financial statements are presented fairly and in compliance with generally accepted accounting principles (GAAP).

Control Activities

Control Activities of the organization’s policies and procedures which help ensure that necessary actions are taken to address the potential risks involved in accomplishing the entity’s objectives.

Information and Communication

Information and Communication focuses “on the nature and quality of information needed for effective control, the systems used to develop such information, and reports necessary to communicate it effectively”.


Monitoring involves assessing the quality and effectiveness of the organizations internal control system. It includes assessing the design and operation of controls, and assessing compliance with policies and procedures. It also provides for the implementation of appropriate actions whenever necessary.

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