Aims of Internal Control in relation to Financial and Accounting Aspects:
(Objectives of Internal Controls Over Financial Transactions & Accounting of Transactions)
Transactions only after Authorisation à
Prompt Recording à Proper Accounting Period à Appropriate Accounts à As per Applicable AS à Correct Amountà
Then Balances Compared with Existing Assets à No Unauthorised Access, Use or Disposition à Maintain Accountability)
It is clear that internal controls relating to accounting and financial aspects primarily aim at providing the flow of work through various stages so as to segregate the authorising, recording and custodial aspects of the transaction.
Internal controls relating to financial and accounting aspects are concerned with achieving the following objectives –
(i) transactions are executed in accordance with management’s general or specific authorisation;
(ii) all transactions and other events are promptly recorded in the proper accounting period , in the appropriate accounts and in the correct amount, so as to permit preparation of financial statements in accordance with the applicable accounting standards, other recognised accounting policies and practices and relevant statutory requirements, if any, and to maintain accountability for assets;
(iv) the recorded assets are compared with the existing assets at reasonable intervals and appropriate action is taken with regard to any differences.
(iii) assets and records are safeguarded from unauthorised access, use or disposition; and
For example, in a transaction involving purchase of fixed assets, the Board may authorise the Purchase Manager to purchase fixed assets. At the authorisation stage, the internal controls aim at ensuring that transactions are executed in accordance with the management’s authorisation, general or specific. Thus, it ensures compliance with prescribed policies and procedures.
The recording of the purchase is performed by the Accounts Department. The internal controls at the recording stage, in particular, aim at ensuring that no single person can handle a transaction from the beginning to the end. When obtaining an understanding of the accounting and internal control systems to plan the audit, the auditor obtains knowledge of the design of the accounting and internal control systems, and their operation.
While the custody of assets rests with User Department.
(Walk Through Tests)
For example, an auditor may perform a “walk-through” test that is, tracing a few transactions through the accounting system. When the transactions selected are typical of those transactions that pass through the system, this procedure may be treated as part of the tests of control. The nature and extent of walk through tests performed by the auditor are such that they alone would not provide sufficient appropriate audit evidence to support a control risk assessment which is less than high.
Factors Affecting NTE of Test of Controls
The nature, timing and extent of the procedures performed by the auditor to obtain an understanding of the accounting and internal control systems will vary with, among other things.
Ø The size and complexity of the entity and of its information system.
Ø Materiality considerations.
Ø The auditor’s assessment of inherent risk.
Ø The type of internal controls involved.
Ø The nature of the entity’s documentation of specific internal controls.