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{, trnpter"hrternal Contl 'ol

4 .1 INTERNALCONTROLS-I}ASCSIn terna l contro li \ l eanrng r \ s ; re rAAS- 6 )

5copc ol ' ln terna lcontrol system

. Objcctin" oi :z i . .i . " ' I n tc rna l con t ro ls' rcgard ingar :corrur ingystem

L l A l \ t ' 1 i i r , \ 1 t * , , ' . J L ) " ( f l r t *) - | ,^ P-rnt i i ' \ , / t , t r I ,

Contro lEnvirt lnment

, ' l ' l r l f lan of nrga'r isr r l ion nr l. a l l pol ic ies proceclures.. adoptedby man:rgerncnt,' to ensure,' order l ) '& ef f ic ientconductofbusiness.( ) l.C s-vsfernonsists

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InhcrentLimitotiorts-l n i tL i m s t , 1 i ' : r , r f " C .

\' rI'

( a ) [ ) cv i s ing and r r ra in t l r i r r i r r g. ( ] . Svs lc r r r s r l spo r r : ; i h i l i l - , 1r ' r1 l r1aelnent

(b) N' l i l r rage:rnentl toulr l rcvieu i t per iodical lv to enr; l l r r i i , ,ef -e t iveness.

(c) N4arragernentan e: ; t i i t r l ish a separatc rkpar l i t renl cal le

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46 , . .h , l 1 ; . lConlrol Risk trIeunirrg (rr Dcr,/l:lS-6 "

l n t c l ; r : r l l t r n t r o l \ s t e n i l i i : - l r . r .' [ )1 -g r i l t o r' I )c lcct & ct ' r rrcct ,. j ' \ ' 1 iss ta teurcn tson t i rne l t b l rs i : . .' I t t l t t ' r u t t ti r l i t . t l i t l n rr l i r r i . : r 1 1 1 1 i. r 1 1 i r r , l .. I ) t re to Wl r i c l r l . ( syste r r ia i is to o l )e r i r tc

ttIIIJgtt

Accorr l r t ing&financi:r l controlshe lp i n

Ressotti l s ( t ( . S i l ' C ( 1 .

(l) SpecifyingAuthori\, to crntertrto ransrtctitrt .( i i) Safetrluurdin6'ofassets.(iii) Recording of Trans action rt the accotllltcort-ectlr'.(ir.) Fixing responsibilirl ' br rvork donc.(v) \{airrtainins ecc.rds n stsndardiserl ar .(vi) I'erfornting vork in logicol seqtlence.(i ii) trfinimizing /osses-.(v i i i ) [ : r rsur ing onrpl iance vi th Rcgulat ions aving directhear ing n i icc{ j r int tng(ix) Preventingtnaterialmisstolements.(x) Detectitrg& correcting rnaterialmisstatetnctrts(xi) Preparation f periodicol reportson timcly' basis.(xii) Ensuringadequate nd tirrrely'1/7ancial reJtorting.(xi i i) Segregilion of accourlting& cLrstodialirrrctions.(xir,) trstablishing rocedures n such a wa)/ so tlrat singleperson (:{ttt '?hut' t : ".:ttrrfletr-econtrol overa transaction rorn starting o elrd.(xv) Providing for internsl check, by rvhich rvork of one person s rev tc,r.rd -'varrtilitct'(xvi) F-ormulating ut-off procedures to separate ransactionsof tr.vocons(;,'rtr1rr,/(:r'trrs.(xvii) I{avinEproper documentslion/ nanual at every stage

4.2 RIVIEW OF I.C. BY AUDITOR VRevicrv 0f l.C -MeaningNeed for reviewRole/Advanrageiof

Review of LC. refers o,- Examinatigl and evaltrationof lntemalcontrol syslelnof tlrc clicrltroii',i" ln;i .C.-;tai;;i;;d;q;;i;.ri "nuui"sli; udii;; n t""rtiin *t.'etn"i(l) Internalcontrol systenr s otlequote& operating e fectively'(ii) I .C. is able o preveltt, detect& correct rrtatcrialmisstolemetrl.(iii) l.C. Properly afeguarcls he assets-( iv) l.C. ensures orrect recording of transactiot l.(v) Reporls& Certificate providedby managernctrtare reliable'(r,i) l-C. areweok excessive n a pafticulararea.

. .qvii) Effective internsl oudit departrnents in operation'tt"'*i\,;ii) Suggeslions an be given to management o improve he .C. s)stclrl,. (ix) Extensive Substantive procedures re required'I t*) Audit procedures r techniques eed o be changed from plarlned e'rtes"

tfIffIctttttlItCetCCC

1tReview

r l r ' r , , 1-) ;-. r . ,i {t\. 1 r. , - . \- ? [ ] r ' t i u "

4 ' . - ri ' r r . 1 ' r ' ' l ' r ' 1' r i \) ,,^1rii-\t.rc , Cov. (qnr\oii , r{i rv"'1,.:J N f rl ar,/it

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L i tn i la i io t t

' G ranh i c p l - c : - r c ' t l l i l l l on -. o l caclr ar t o i '. cnt i tv 's t r tcr t ia i l t t l rcr l \ stenl 'St t , .c l :t tntrol l r t ,cer l r . r rcat tbedel l ictecll t i l l , r t t t i ) lrlragraln.-l' ltc r\trtlitt 'r prcpares t alicr pt.ope strrt lro f l . ( . Sy'ster l i '1 'c l ie l { .( ) Cortcise rcse i t l t t iot t .( i i ) Easi lv i r lc lcrstant lable '( i i i ) Civcs"Lr i r

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1 , . { '

I. Distribution ofpt)WCrSr n l

irl of indnrinisiiiiiue& iinu".i,iii :>tr i r rg ci rcquesetc. l s i rouir ipersorrnel.A Single person hould r l ( ) t have indepencl int; , .y11111l n.er an-\ ,impor lantaspcct f brrsincss.Persons having physical custocl l , ' f i isets shoult l not hr ' .access o accounts r rccords.Al l actsof on" p"r . . ,nshould corneunder he rcr cr ' , of anot l rer

powers (Eg:- orderinr_: prcduct.t rc drst i lbuted trr r i ) t i , tCi l ' l r ' r rnr

i t 'o"t,t be changed rom tirnc to tirne iuiih,:ut

2. No Independentcontroli. C;;i"ij-niiiiii'clistribuliotr: 4. Check by

, ttttother: . .i 5. Job RotationLeuve

E,ii'i','ig"lirycontrol Budgetsaiidld * p'.poiiodiflerence betrveenbudgeted &should be enquired nto-

for imporlant acri ; i r i ;s.actual igure s sisrr i l icanr.

i: 6 .

Duties of staffP_t"Yi9u,s,oJi9_9:Every personnel hould be encouraged o go on lcave at ieastorrce n a year.Fraud done by ernplol,ee an be dctected easillwhe;; he is absent.

l. 9-9 trg _a ^: 9. Stock Control' 10. Cash Control

For each important asset, accounting control should alscper iod cal y cxamined.During stock taking at end of accounting period, tradir:gact iv i t ies hould e suspended,f possible.

To prevent misappropriationof cash,mechanical devices (8g".

t:

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AccDl i nt i : i ' ;Svstertt

ilIeaning

ll'h],uuditorshouldunderstund it

llTeuninl;Objectives

ln t r rna l Contro lS-vstem

Ser ics t . r t ' task: t r l r - l rca( r ' (1, \l - at l er l t i t t l rv i r l r ich trans: tct i r t l rs i replocesset l ls l l lc i . i l isr l r r la i r l l l t i r t inginlr l r :cor t ls '' I -oi i lcnt i l_t ndurr , - lcrstunr ll re i l l lorvi r rg t cl i , : r r t 's i tc-e . ( ' l r r sscsf t r l r t ' t c t i t t t t s :b. Iv lanner l ' in i t i l r l i t r r r l - r r t r tsact iot l : tC. Signi{ lCarr t tcc, : ) l . t l l t i l lg -gct- r rdS,t lJ) [ )oi i i l l { ]i t ' ic t . t t t lct t ts;t r t l rp ' : : f ' -accot l t t tsn t l re l l l i r l lc ia l statctnents;r rdci . I l rcaccount i t igt t r

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ll{eunittg

Reason/InlterenlLimitotions ofInternol Conlrols

Assessmenl fcontrol risk

C,r , r t . , , i r i sk is the r isk tha t r t ra tcr ia l t t r iss ta tcr t ' cn ts l i l l : ; i : l 5eprc i t r r lc t i r , f r i t tec ie t l , r r t i cu t i rc te t i t t r t a t i t t te iv b l t s i s i l t r i " .

, ln te rna l Coa l r t i l Svstem.a . ( ' o s t c t ' f c f v c n e s s :

, b . ' I - ransact io r tso f un t ts t ta l ta t r t rc n tav be rn issed rY t r t r ls tc t t r t { r ' l ls .I '., c. Pote rt t ia l of lruntan error-:

, ( 1 . ' i r r U n t v e i r t i r r n f c o t t i r o l s l i l r , r l u l t o l l u s i o t t :: e . A t l r se o f cor i t ro l b l the perso i t uho is [ r imse l f rcsJ) ' ) l t s i t ] ci ) r. - i 1 r I: excrcls l l l l } .i . A l ' ,, . f . l r ra. lcquacv f procedures lr re o chirngesn condit ions.ar lJ1'g. " laniptr lat ior tsl n- ,anagcnrenl .:t,Preliminory , l. It refers o evaluating he l ikely cflectir' ':rte-':- '-' {, Asi&iiteht of . an entitv's irrtenralcontrolsystent n p'evenlin* -. tt Cyyt-fql {., iSt" : detectingand correcting naterialnrisstatern'iilt:i.; :2. The auditor shoLr ld btainan understaniJinl : .f: r: : internalaontrols to makea preliminary asseslnleni: : of the corrtrol r isk'' , 3. Thus, the atrditorshouldassess he contrcl riski , as high unless he auditor:: . (a)ls able to identi ly internalcontrols whtci i ar c: . *:3.,fl,iffJ;J":,1;f"'andc

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( ' haP^ l,1u./ i l i1t dld 1l \ \111', t t ta( ' - - , ------ ' -52 ', ,-:,-- '-U e t e c t t o r r R i s i < i , i r u t t i t t 1 4 - J c t e u i i t l r l r i - k i ' t i . . , , i s , . . i . u t t . t . ; t t t t i i r t r r . : s u i r s l a t l i i v t , | , i o t e d u r , c s rvi l l not detcct a l l la ter i i l l n l issiater l le i l t '

' T h . . . i . s a n i n r ' c r s e r e | a t i o n s h i p b , . : t r v e e n c l e t e c t i o n r i s k i r n r l t } r ecolnbinedcvc l t l { - inherent11dr '11{1olisks '

. ' f11115, ,hcn ir t l tcrcntand c0l l t r ( ) l r isks are high' acceptabled e t e c t i o n r i s k s l r t l t r l t i b e l c * ' t < , . r e c l i r c e t h c o v e r a l l a u d i t r i s k t o a n

Rclnliott w'illt otlt erri.rA.s

: : l i ' r Y : : ;t lor i t l , r l r , t t : tSmal l Business{-omrn l; l icat ionof Wcnki lcssesin Internal{ .on t ro ls

acceptablYou' levei '. l{orvever, lte assessedbe suff icientl l ' lorv tc rprocedrre

If detaction risk Cortt ' The auditor sirotrld expresshe retluced o oPlnloll'uccePtubll'o*'level

AUDIT RISK(Risk of Providing inaPProP

. 'fhere tllav not bc suff cientsegrcg:rtion of funetions atrl()llgrvhoperfornt accotrntirtg rocedtrrcs'

. Tlrus,atrclitorshould perfomrmore substantive rocedureso

. Any rnaterial rn.ukn"t, irr the inter-rtal"ontrol lroticecl by the auditor shtluldbe

cornmr rn i ca ted in rv r i t i ng to then lanagemer l t i na t in re l y | l l an l l e r .. I{orvcvcr, lre shoulclntention n the comrnunication lrat atrdit hasnot beencondrrcted o

deternrine lre adequacy f internal corltrols'

le', 'eistf itrlieretttand control risk cannotc l i r t t i r t l l t el r c r r cc t l ( ) pe r lo r ln t t l r s t l t t t l i r c

quali l ic'cl opi, l ion or a clisclairnel f

a srnal l untber l { -personstbrm his oPiniorr egarding

t DetectionRisk (l)R) - l I, Detection Risk (D.R)

cirRisk tltat ertrclitor'substantive rocedures, rvi l l not detect a MaterialMisstatement', Arisesat auditor's level'i Audit.',t an frame this risk'

, auditor-, DR slrould be inverselyproportiortateto' combinedassessment f I R & CR ':, DR a I/(IR+CR), lf tR & CR are high. DR shouldbe kept atr lorv evel-

- . . , . J . -Inherent Risk (IR) I

a Risk that MaterialMisstatementsnlaY occur'Ar ises t level of Inat tagentent 'Atrdi tor an or l lYassesshisrisk.Risk of SYstem of management'iinls t$ generallYhigh'However certain factorsmaYbepresentdue to which it canbeless han high-

Control Risk

Control Risk (C'R), @ Risk that -C' ail to oPcrateas: desired.

Arises at levelof managetnent'Auditor can only assesshis risk'

Risk of I .C. SYstem f: trralry_e-mery__' fnit is evaluatedn s/ages Sec. chartbelow)"::

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St:rge - Prcl iminary Assessment f Control r is l i---t___l

High\n/i-,,,ro.C. system doesn't:r; : . : f ObegoOd&.,,,-r i toroesn't ant o check,'., ' ,":t ivenessf .C.system.

HighHe needs o change is previousPlanning

LowBut to haveevidence hat .Csystem s n fact good, aucj i toineeds o performcompliancen r n c o e l t t r o cv r v v v v v , v v

Stage l l - Conrp l i : rncc ro t r : r lr - ' , J L -"- '- ; jLottt" t 'trqt *

To check dgsigninq. operat ingeffectiveness continuitv of l.Csysjc- 0,Based upon results o{' complianceprocedure,he finally assesses C'.

De- '

Stage l l l Final Assessment

* - . ." ._'.--.- ' ]Low IHeaccordinglyrames eteciion I.Ek II-__-_. -_ I

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t.IaIaafJIt

() {SlcpsandObiectivcsofI r t tcrna lAr td i (I,'nnction

Relat ionshiPbettveenIntern:r lar tdFl . r' " * : r lArr t t i (ors

, \ { (dt t i t tg

Il dtpands ort(-oteragc

ln tcrna l r l r i l i t s h l r s i ca l l l a par t o l - l ' ( l svstenr '' l.o cl i , :ck t le: ir : r i i t r l : . . operating e{. t -cct ir 'crrcssand contirrtrrtrr . r1 / r i r ; ' i i r t c r t t l l lco t t t t -o ls ' T)ec '

5 i z-cof cr l lan rat ion lrr l l rcqtt ct ltents o f- ltatt tgentetlt '. I{eviev' ' of accr lrrrr t i i lgat l t i t 'C sytt"t ' t t .. l : . r i i t i i i i , c l r l i t r r c i l r l r o i l opera t ing r i {b r r r la t io t t ( ) r t l la t tage tne t t i"1 .st c uoi'Yvri\$-\z'vrtut-t' ii*L( ii*" cF.; { . - li::"' \ L'rrrciit('r' ,insicD-l,t;,,.;\;4, c\\oe- I,rrernaludit lirtcrnal 'ditAppoiniiiient l l l ' Ntattagenrent: ' I),v- 11rnbe1s,

' Scopc ' I ly Nlanagetnent ' 81 'Larv ' CAI'

' aircl contirruiry*f I.C' .S\ s lu l l ), I Io* tr, ,se . Lrxte.r'al 'rlitor sl l()u.l lrirnself clreck l.c. (perform conrpliance

irttcrnul nudilrtr's procedures)' lte shoulcl el -1vorkof internal auditoron whiclt hc, *,ork intends o relY''. l l e c a n d e t e r r r l i r l c h i s . N . I . E . b a s e d t r p o r t e v a l u a t i o n o f i n t e r n a l a r i d r lttrnction'

. F.rtemalatrditor lone is- :ei'lgr-rsiblcbr his reporl (Relianceor' internal udi tordoesrt ' t educe t) '.h ntcrnal auditorhis plarrat early stage':

. ' Meeting should be condtrcted t regtrlar nterval', ' Th-ere houlcl, organisatiottol . wt.,"ri ", internal n,,.tito. reports directly

to top management and is

. Scope of , ] Enq.,i," about natttre nna .r"ptr' of coverage of irrternalauditor,s work; coveyoge, ;;; ; ; ; ;- I l4;u" 'nug'*" '11:9:: i9"*hlsre9'om1"l1d1l i9n':' . Tecltricsl Whether prol-essioriallyrained persons rc perfornring nternalaudit

ttI

atCCttC

IIII{{((

( lo-ordination

General[-]valuationofinternal auditFunction

Coynpete,yceDrteProfessionul WhethcrCsre cloct t tncnl

lnternal Atrclitor ptop"' ly plans' supervise' rcvicl l ; l t tJh i su o rk .

IlvaluatingSpecific nternal. nn -13 i . : r r ra l r . '

Conclusion

Consider f:.. Work of intenralarrclitors adequate br him'. Work of interrralauciitors asbeenproperly P-lanned1d's-Ypervised'. Conclusionsby internal auditor appear o be lPProPtlt"'. lnconsistency cientif ied y internalaudito;h;s beenproperly rcsolved by managentent'1.lrestatutoryauclitorrnay relv on Intenral a,".riiot, provided he exercisesd"reskil l and carr:and there s nothing tci cloubt'

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r (.1e're.V-(i \) ? Lrrrht L- 1\plrr'ccrhuaD?rrlt-tL .

1 ort+iti''u ,sLJI UutetrI Cru&rori7.d fcrsO'vr -tllr- ait [o'' [u"'yex-t'.

ry- {'1.cu')'t-u{")tl^,)o$uorri Crl uu:rrv)- f ' t ' i i + . : . 1 5

5g$q*lr'v31rslP

t.+X'1v*t--t Ddtl' 'iD v\tel

1>f.e'uJd \a fUU.Ivl0llr-d . La.v q(( r. LL\A-LI

t 'l.tul0 t:(\c-r'q' E.D.P,Auti i t

Fl"l'F I N A L CONTROLS I N tiD P IINV tO N ': i,NTT'1,rr{.,,,.':.{ 'Genetct . -+;f r " '

. { t l

d J - '

F1.1"i' t l : : . i , e . t { i o n

: 1r \1overal l controlsat- f 'ect ine' . I )P nvirorrnrcrr t( icneralEDp corr t rors) .(B) Speci f ic onlrols - , r ,er pcci l lcappl icar io i isF,DPAppl icat ion . iontr -6ls) .( : r ) Organizat ionund Mlrn:rgenrent-ontrols:- - -' ' Designir rg ol ic ies at tc l roceduresei i r t ing o control Lrrct i r rns.' Segregat iorrl - inconrpat ib leirnct ic 'ns.(b) S.vstcrn ol ' tuare Conlrols:-

t Restrictecl cce s ol-so{irvareo autirorisedpersonnel nly.' Authorization, approval. estingancl nrplernentatiorrf rrew systelnssoft.rr,are.(c) Application System l)evelopment and i}{aintenanceControls.-

: - RestrictedAccess to system ocumentation.' Changeso appl icat ionsystemshould be author ised.' Acquisition of applicatiorr ystems ionr third parlies hoLrld e carefullynlanrre

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tI

58 Chap .5 ;TTt

tIIIIII

t n lFlfEIiN.AL C'iiir'i'R^oLS i .l 5r. k v lL l., s JR )A II i 'sorrre arrol icat ic ls, l r f i tc el icrr tare carr ier l )ut a t : r scrvice tureatt . hcrc shotr ldbe a proper l l l icr ia lcct t l tus\ . .stern. hls is r r ' r lLr i red rai : r lv t rccausc lat . i r r rc.r ,csLrts ide l ienl cnt i t r ' . l r . rst rchcases. i r l lorving shouldbeci-)nsidcred:{.r) T.lrereSliOr-rldre trOPt:r:r.ordittatic.nelu,ce l trttrcatt nduscr.(b) Proper est ing '1 l ic s) 'sten slroulcl e carr icr lot t t . (tc) I r ropcr f i le corrvcrsi , ' r r. : l i i :cki : lgnrcci i t t t t : ; l r t l t r id e Lrscdrv l ie t lser ' -i i l ) ' l hcresiroulci g corr t roi r |er thepl lv-si t :atI l ( )vel l tent f data.(c) ' I l rcrcshould s grr11t1-r . r l. r 'et ' theI ]ai l l lc l l i l i l ( je1' r tasterl les.( ' j ' l - l r e r cs l rou ldbec i l r t t l o l t . r . . ' c r t l t t t p t r t t l i s t r . i b t r t i l . r r t 0e | tSurc tha to t r tpu ti i r ) ' l - l rereshcul t lbe rrranrral t . rntrolso ver i fy ' t l tcacct l racy f cotnJr tr ter) r ( )ecs\ ing. t(h) Appropriate ejcctiorrprt'rcr:chrresh,-ruld c iidopted, n cascclata s {btrnd to be erroneous.f

5.3 TYPESOF I,DI' ACCOUNT SYSTENIS

tJIttttt

-4

B-:rtc-h- i l'pl'qgessing ' 2systenrs l 3 .1+ .5

rr",rroliio,t, ur" o."unlulated anclprclcessetln grotrps'Control totals record count, financial otal and haslr otals)arc derivecl o ellsurecorupleteattdaccurateprocessing.2 ty, 'pes if i les are nraintained:Master i le and Batch tile'tJpclating oesn't ake place asquickly as in On Line RealTime systems.-l 'his is simple system,but now a day, t is rarcly iound due o availability oi'advanceiiand quick sy'stems:' l ' ransactionsareentcredatld processed t t lrc salr le inle rvhen hey occur'' l-hereis continuousupdating of databases.I-lorvevcr. his is ntore conrplex hanbatchprocessing'Ordinarily. thel ' 6ott', provide audit rail.- fhus,auditing n suclr s) 'stems eqtrires pccialcotrsideration y auditor.l-- r ex_arnl9, aj Jliqe r9_19rv1t91s a1-dAT M' s

Sl t , vc , . * . \ r \ ( dDals ]ti (r (^\\$tarot ' ( l ; ' :L ' r ' J'g '*{ lOn line real ime(OLRT) SYstem

l .2 .

:"3 r1 d5 .6 .

AUDIT TRAIL IN EDPENVIRONMENT5.4IIII(

(

Audit trai l-meanlnB , Audit trail meatls racing a transacttotlIt is a situation rvlrere t is possible orion.,sioni,tg" ."J "^a i."relate he or ig inal nPut vi th

versa.the final orttPttt

Audit trail in EDP

How to compensateloss of audit trai

on'one-to-one'basis.Audit t ra i l s general ly ot avai lablen(a) Direct data entry' rr to the system-(b) Direct postingof transactions o master l le'(c) pliq 1atlgr of repo$ bg91u9e-info1ryations proy 9d-otl-ltn9'Auditor may use ollorving to compensatehe loss of audit r ial:(a) CnAT(b) Programmed nterrogation acil i t ies.

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