INTERNAL CONTOL

Chapter 2

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Meaning
• Internal control is broadly defined as a process, effected by an
entity’s board of directors, management and other personnel,
designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
• 1. Effectiveness and efficiency of operations.
• 2. Reliability of financial reporting.
• 3. Compliance with applicable laws and regulations

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Nature of Internal control
• Internal controls can be detective, corrective, or preventive by
nature.
• 1. Detective controls are designed to detect errors or
irregularities that may have occurred.
• 2. Corrective controls are designed to correct errors or
irregularities that have been detected.
• 3. Preventive controls, on the other hand, are designed to
keep errors or irregularities from occurring in the first place.

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SCOPE OF INTERNAL CONTROL
SYSTEM
• It is very important to have an internal control system for an
organisation.
• There is no universal model of internal control, system. It is up to
every company to design an internal control system which is suitably
adapted to its situation.
• Internal control is neither limited to a set of procedures nor to financial
controls.
• Operational control such as quality control, work standards, budgetary
control, periodic reporting, policy appraisal, quantitative controls etc
are all parts of internal control system.
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 INTERNAL CONTROL OBJECTIVES
• Internal audit evaluates the organisation’s system of internal control by
accessing the ability of individual process controls to achieve seven pre-
defined control objectives. The control objectives include:
• Authorization - the objective is to ensure that all transactions are approved by
responsible personnel in accordance with their specific or general authority
before the transaction is recorded.
• Completeness - the objective is to ensure that no valid transactions have been
omitted from the accounting records.
• Accuracy - the objective is to ensure that all valid transactions are accurate,
consistent with the originating transaction data, and information is recorded in
a timely manner.
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• Validity - the objective is to ensure that all recorded transactions fairly
represent the economic events that actually occurred, are lawful in nature,
and have been executed in accordance with management’s general
authorization.
• Physical Safeguards and Security - the objective is to ensure that access to
physical assets and information systems are controlled and properly
restricted to authorized personnel.
• Error Handling - the objective is to ensure that errors detected at any stage of
processing receive prompts corrective action and are reported to the
appropriate level of management.
• Segregation of Duties - the objective is to ensure that duties are assigned to
individuals in a manner that ensures that no one individual can control both
the recording function and the procedures relative to processing a
transaction.
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 ADVANTAGES OF INTERNAL
CONTROL SYSTEM
• Increase in operational efficiency : One advantage of internal controls
involves the efficiency they create. Technological advances to improve the
accuracy of each transaction also streamline manual processes.
• Accurate Recording: Another advantage of internal controls revolves around
the accuracy in recording each transaction. Internal controls help prevent errors
and irregularities from occurring. If errors or irregularities do occur, internal
controls will help ensure they are detected in a timely manner. It creates
confidence that only authorized transactions have taken place.
• Protection of Employees: Internal controls protect employees: 1) by clearly
outlining tasks and responsibilities, 2) by providing checks and balances, and,
3) from being accused of misappropriations, errors or irregularities.
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• Safeguarding Assets: It minimizes of the risk of fraud and misappropriation of
assets. It involves fraud monitoring and prevention techniques. For example in
case of a banking internal control system, monitoring activities include security
cameras and security guards and prevention activities include cash counting by
two employees at a time and cash reconciliation by non-tellers.
• Compliance: Another advantage of using internal controls includes increasing
compliance with regulatory agencies. Internal controls encourage adherence to
prescribed policies and procedures. It assures that adequate documentation
supporting transactions is created and retained.
• Benefits of Internal Control to the Auditor: If the audit client benefits from a
sound system of internal control, it is likely that the auditor will also be
benefited. All of the above stated benefits help to promote a situation where the
financial statements present a true and fair view. A good system of internal
control will make life easier for the auditor

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 LIMITATIONS OF INTERNAL
CONTROLS
• Judgment - the effectiveness of controls will be limited by decisions made with
human judgment under pressures to conduct business based on the information
available at hand.
• Breakdowns - even well designed internal controls can break down. Employees
sometimes misunderstand instructions or simply make mistakes. Errors may also result
from new technology and the complexity of computerized information systems.
• Management Override - high level personnel may be able to override prescribed
policies or procedures for personal gains or advantages. This should not be confused
with management intervention, which represents management actions to depart from
prescribed policies and procedures for legitimate purposes.
• Collusion - control system can be circumvented by employee collusion. Individuals
acting collectively can alter financial data or other management information in a
manner that cannot be identified by control systems. A well designed process with
appropriate internal controls should meet most if not all of these control objectives.
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 INTERNAL CHECK
• Internal check is best regarded as indicating checks on the day-to-day
transactions which operate continuously as a part of the routine systems
whereby work of one person is proved independently or is complementary to
the work of another, the object being the prevention of or early detection of
errors and frauds”.

• The main objective of internal check is prevention of errors and frauds and/or
detection of errors and frauds at the earliest. Internal check is a continuous
process and is part of the day-to-day routine. It relates to all the transactions
that take place every day. Internal check is achieved by complementary
allocation of duties and by independent verification of the work of one person
by another.
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• Internal check is a part of internal control system. It ensures that all financial
transactions are properly recorded.
• It also ensures efficiency of the accounting system followed by the organization
and enables easy preparation of financial statements.
• It achieves its main object of minimizing errors and frauds. A sound system of
internal check increases the reliability of financial statements.
• Internal check discourages fraud and collusion among employees by instilling a
fear of detection in their minds. Internal check assigns responsibilities to
persons and enables maintenance of records and documents properly and
thereby ensures smooth flow of work.

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DIFFERENCE BETWEEN INTERNAL CONTROL
SYSTEM AND INTERNAL CHECK SYSTEM
INTERNAL CONTROL SYSTEM INTERNAL CHECK SYSTEM
Internal control is the system of control established by Internal check is a system of allocation of responsibility,
the management in order to carry on business in an division of work and methods of
orderly and efficient manner, ensure adherence to recording transactions, whereby the work of one
management policies, safeguard assets and completeness employee is checked continuously by another.
of records

It consists of all the methods and procedure adopted to it is a system of allocation of responsibility, division of
assist in achieving the objective of efficient conduct of work, and methods of recording transactions, where the
business. It includes internal check and internal audit. work of an employee is checked continuously by
another.

Internal control is broader concept as compare to Internal check system is one part of internal control
internal check system; it contains many more types of system.
controls other than the internal check system.
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INTERNAL CONTROL SYSTEM INTERNAL CHECK SYSTEM

The essence of internal control system is in The essence of internal check system is that the check
implementation of Internal check and Internal audit. should be automatic, continuous and objective

Internal controls are designed and documented at the Internal checks are implemented to al organizational
corporate management level. level such as tactical and operational level.

The system proves to be costly in case of small It is a part of internal control and a method of division
business. Because more number of employees are of work, therefore it Does not add to the cost.
engaged.
It includes financial and non financial controls. It is only one method of internal control. It is mainly
concerned with the organizational plan of the business
so as to ensure better efficiency in the operation.

Internal control provide for built in MIS reports. The summary of day to day transactions work as report
to the senior. 13
 Objectives of Internal Check
• 1. To exercise moral pressure over staff.
• 2. To ensure that the accounting system produces reliable and adequate information.
• 3. To provide protection to the resources of the business against fraud, carelessness
and inefficiency.
• 4. To distribute the work in such a business transaction is left unrecorded.
• 5. To allocate duties and responsibilities of each clerk in such a way that he may be
held responsible for particular fraud or error.
• 6. To minimize the chances of errors, frauds or irregularities in the business based on
the principle of division of labor.
• 7. To detect errors and frauds easily if it is committed, because in an efficient internal
check system, there is based on the principle of division of labor.
• 8. To detect errors and frauds easily if it is committed, because in an efficient internal
check system, there is a provision for independent checking. 14
 Essential Characteristics/Principles of a
Good System of Internal Check
• 1. Responsibility: Responsibility of each individual must be properly defined
and fixed. The work of the business should be allocated amongst various clerks
in such a manner that their duties and responsibilities are clearly and judiciously
divided.
• 2. Completion: The work should be divided in such a way that no single person
is allowed to complete the work solely by himself from the beginning to the end.
However, there should be no duplication of work.
• 3. Rotation of employees: A good system of internal check should not allow
person having custody of assets to have access to the books of account. A
system of transfer or rotation of employees from one seat of work to another
must be followed by the business.
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• 4. Automatic check: A good system of internal check must provide
for an automatic checking of the work of one clerk by the other.
• 5. Reliance: No clerk of the business should be relied upon too much.
• 6. Safeguards: Safeguards should be prescribed to keep un-used
cheque books, files and securities etc.
• 7. Supervision: A strict supervision should be exercised to ensure that
the prescribed internal checks and procedures are fully operative.
• 8. Formal sanction: No deviation should be allowed from the
established procedures till it is formally sanctioned by the top official.
• 9. Periodical review: The system of internal check is reviewed from
time to time to introduce improvements.

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 Internal Check with regard to Wages
• The system of internal check for wages should be devised in a careful and planned
way, especially in manufacturing concerns, employing large number of workers,
possibilities of frauds are always there.
• Thus efforts should be made to prevent such frauds with the help of some suitable
arrangements of internal check which should be revised from time to time in the light
of experience gained.
• System should be actively enforced and supervised by some responsible official.
• The Objectives are as follows: a) To avoid inclusions of dummy workers in the list of
workers.
• b) To avoid incorrect time or piece work records.
• c) To avoid fraudulent manipulation of wage-sheet and misappropriation of money
etc.
• d) To minimize such frauds, the following system of internal check for wages is
suggested. 17
 Maintenance of Wage Records
• 1. Time Records: Workers are paid their wages normally on the basis of time.
Thus the time spent by each worker should be correctly recorded in the time
record book and for this purpose the following methods are in practice.
• a) The time recording clock: The time recording clock is placed at the gate
under the charge of a timekeeper. As soon as worker enters the gate, the time
keeper inserts his time into the clock which records the time. It is recorded when
the worker leaves the factory.
• b) Brass token: The workers are given brass token bearing their numbers. At
the gate, a time board is maintained on which each worker hangs his token as
soon as he enters in the factory. The time keeper is thus able to record the time
of workers entering the factory. He should be vigilant enough to see that no
workers hang the token of others who are late or absent.

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• c) Attendance cards/punching machine: Each worker is provided with a time
card with his name, number, department and wages rate mentioned on it. He
should punch card at the time of his arrival and departure. The punching or card
must be supervised by the time-keeper. Foreman of each department should also
be asked to keep the time records of his workers. The time keeper and foreman
should separately prepare the time records and the name of absentees at the end
of the day.
• d) Computers: This method is the most popular method now especially with
the multinationals. An identity card is issued to each worker and when the
employee enters the factory and leaves the factory, he puts his identity card in
the slot of the time recording machine. This machine is controlled by the
computer. So the computer records the time the employee spends in the office.
Another advantage of this method is that only with a proper identity card, the
employee can enter the office. That is only if the identity card is the authorized
one, then only the door will open for the employee.
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• 2. Piece-work records: Where the workers are paid on the basis of the wages
system, proper hooks for actual work done by workers should may be
maintained. Each worker should be provided with a job card or piece work
return form bearing his name, hob number, nature of worker should be recorded
on this card which should be countersigned by the foreman of the department.
Store-keeper to whom the goods manufactured are handed over, should sign this
card. It should be finally checked by piece work reviewer along with quality of
goods.
• 3. Overtime records: Ordinarily overtime work should not be encouraged. No
worker should be allowed to work overtime unless he is authorized to do so by
the authorized official of the organization. Strict check must be kept on loiterers
at the place of work. Overtime slips should be sanctioned in advance. Such slips
should bear the name and number of worker, overtime put in the job or the
department in which he is engaged. At the weekend such slips should be sent to
the department in and the job or the department in which he is engaged. At the
weekend such slips should be sent to the time-keeper who will forward them to
the wage office.
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• 4. Pass-out records: The workers should not be allowed to leave the factory
before the scheduled time. But if sometimes, a worker wants to go out of the
factory on his personal work during working hours he should not be allowed to
go out of the factory premises without obtaining permission from authorized
official who should issue passout slips. Such slips are handed over to gatekeeper
wage office should also be given copy of such slips. In case a worker leaves the
factory before time on his own account, it should be properly accounted.
• 5. Preparation of wage sheets: The preparation of wage sheets should be done
by a separate department. This work should be done by five clerks to minimize
the irregularities. Information regarding attendance can be had from the
attendance register, job cards, piece work register, overtime slips, pass out slips
etc,. For time workers and piece rage workers, separate wage sheet should be
used. In big factories loose wage sheet should be used so that the work may be
distributed amongst various clerks easily.

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• All the essential particulars should be entered in the wage slips which should
have columns for:
• a) Name
• b) Number/code number allotted to him and his address
• c) Total time worked
• d) Details of word
• e) Rate
• f) Total amount of wages
• g) Bonus
• h) Overtime, if any
• i) Deductions
• j) Net amount payable
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• The whole work is to be divided in various parts to be done by separate clerks
in the wage department.
• i. Two clerks should examine the time and piece wage records, over time
records and other statements received from the foreman.
• ii. The third clerk is to prepare individual employee statement i.e., name of the
worker, code number allotted to him and his address, total time worked and rate
of wages.
• iii. The fourth clerk is to check the calculations and deduct the permissible
amount i.e. rent, provident fund, income tax, installment of loans and other
permissible deductions under the PAYMENT OF WAGES ACT, 1936. From the
gross wages to arrive at the net amount to be paid to the workers.
• iv. The fifth clerk is to check the whole work thoroughly.
• v. All these clerks should initial the wage slips before these are signed by some
responsible officer, such as director or works manager.
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 Internal Check with regard to Cash
• The risk of misappropriation of cash needs no emphasis. The chances of fraud
are numerous in cash transactions. For example, receipts may not be entered in
the cash-book: records of cash received may be understated by preparing
duplicate receipt for amounts less than the original. Cash sales may be treated as
credit sales charging the amount to fictitious debtors, etc.
• The following are the points that should be taken into consideration while
devising a good and proper system of internal checks for cash transactions:
• Cash Sales: Cash Sales are of three types:
a) Sales at Counter / Counter Sales
b) Sales by travelling Salesmen.
c) Postal sales.
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• 1. Sales at Counter / Counter Sales: The following procedure may be of great
use in regard to cash sales:
• a) A specific number, name or work may be allotted to every salesman.
• b) Every salesman is supplied with a separate book containing blank copies of
cash memo.
• c) Cash memos should be printed in numerical sequence.
• d) Cash memos are printed in different colours for salesman at different
counters.
• e) When the sales man sells goods to a customer he prepares four copies of the
Cash Memo. These copies are checked by the senior clerk.
• f) Three copies of the cash memo are handed over to the customer and the fourth
is retained by the salesman.
• g) The customer should hand over three copies of the cash memos to the cashier,
who alters collecting the amounts and recording it in his cash register, returns
two copies to the customer duly stamp marked “cash paid”.
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• h) So the cashier collects the amount and records it in his cash register.
• i) The customer should present two copies of the cash memos at the counter where the
goods purchased by him are to be delivered.
• j) Here the customer will get the goods purchased by him are to be delivered to him.
• k) The Clerk, at the delivery counter, checks the sales and delivers the goods to the
customer and also keeps one copy of the cash memos.
• l) In big business houses, the customer’s copy of the cash memo may be checked by
the security staff before the customer is allowed to check out of the place.
• m) At the end of the day, each counter salesman, cashier and the delivery counter
clerk should prepare summaries of Cash Sales.
• n) The cash sales summary prepared by the cashier should be verified with the cash
sales summary of each salesman and the delivery counter clerk.
• o) The differences if any should be immediately enquired into.
• p) If the summaries tally, accounts are certified as correct. Then it is sent to the
General Manager and another copy is sent to accounts department.
• q) Daily cash receipts should be deposited into the bank on the same day.
• r) Where cash recording machines are used, the total cash received as shown by the
machine should be checked with the amount actually banked.
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• 2. Sales by Travelling Salesmen:
• In big business houses, generally Travelling salesmen are employed to push
sales and to collect debts. These Salesmen collect debts from old customers and
accept advances for new ones.
• Ordinarily debtors will be asked to send the remittances by post and not to hand
over the cash to any representative of the enterprise. But in exceptional
circumstances travelling Salesmen may be permitted to collect cash from the
debtors.
• Whatever the case may be, a good system of check over these salesmen is
vitally essential. So the following precautions must be taken:
• a) Travelling salesmen should be issued with pre-numbered, rough receipt
books.
• b) Final receipt against receipt of cash by travelling salesman should be issued
either from the branch or head office to which the salesman is attached.
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• c) Customers should be asked to contact the head office or branch office if the
final receipt is not mailed to them within a stipulated period.
• d) Travelling salesmen should be instructed to remit the entire cash collected by
them to the head office or branch office to which they are attached, without
making any deduction towards salary or commission payable to them.
• e) Head office or branch office should regularly send the statement of accounts
to keep them informed of the latest position as to their liability.
• f) Special attention should be paid to customer’s accounts that have become
overdue.
• g) There should be surprise transfers of travelling Salesmen from one area to
another. This will increase the efficiency of the agents and will also reduce the
chances of fraud.

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Internal Check with regard to Cash Purchases
• 1. Requisition: The procedure for issuing purchase requisitions
should be specified. The head of the department, who is in the need
of goods, should fill in a requisition slip duly signed and then
should send it to the purchases department. The details about the
quantity, is quality and the time by which the goods must be
supplied be clearly mentioned in the requisition slip.

• 2. Enquiry: Purchase department makes an enquiry about the

terms and conditions of purchases from different suppliers. For this
purpose tender are generally invited. But, who shall open and
accept the tenders, should be clearly specified. At a rule, the lowest
tender should be accepted and accordingly a decision be taken. 29
• 3. Purchase Order: The Purchase Department places orders which should be
recorded in the Purchase Order book. Four copies of purchase order should
be prepared. One copy will be sent to the vendor, second to the store
department, third copy to the Accounts department and fourth one will be
retained by the purchase department itself. A responsible officer should
review the purchase order, before signing by the authorized person or
director.

• 4. Receipt of Goods: On receipt of goods, the purchase department should be

properly inspect them, and there after an entry in the goods inward (Receipt)
book, the same should be sent to the stores. Concerned department should be
informed about the receipt of the goods.

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• 5. Making the Payments: The Purchase Department should thoroughly check
the invoices and send the same to accounting department for payment. The
accounting department should compare the invoice with the purchase order
and Incoming Inspection Report and should also verify the calculation. The
Accounts Department should enter the invoice in the Purchase Book. Only
responsible official should draw cheque for the payment of invoice. At the
time of signing, a signing authority must verify that correct payment is made.
If some portion of the goods is returned to the supplier, a proper entry must be
made in the Purchase Return Book. A Credit Note to that effect must be
obtained from the supplier and accounts section must adjust the payment
accordingly.

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• A good system of internal check with regard to purchase will
prevent the following types of irregularities, errors and frauds.
• a) Fictitious Payment: Fictitious Purchase may be recorded in
the purchase book and the payments withdrawn may be
misappropriated.
• b) Double Payment: Some invoices may be recorded twice and
double payment made may be misappropriated.
• c) Artificial inflation in profits: Goods purchased may not be
entered in the period so as to inflate profits.
• d) Artificial reduction in profits: Goods not received in one
period may be entered as purchases so as to show profits less than
the actual.
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 INTERNAL AUDIT
• The business environment today has become increasingly competitive.
and risky, given the complex regulatory framework they need to
follow. Every business is exposed to a certain level of risk over the
course of its life, but what really differentiates a company from its
competition is how they deal with the potential threats. A key strategy
to ensure good governance over the business activities and keep the
stakeholders well-informed is an internal audit.
• An internal audit is an activity that assesses risk management and
ensures internal controls are operating effectively. It deals with the
reputation of the company, cybersecurity, management of processes
and financial risks. In today’s complex business environment, it is
essential that your company is safeguarded from these threats.
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 Importance of Internal Audit
• 1. Assess internal controls
Conducting an internal audit helps review the policies and procedures so you can
ensure that the operations of the company are in line with the regulations. The
existing processes also need to be able to mitigate any potential risks that the
company may face. An annual internal audit continuously monitors the existing
processes and lets you assess the effectiveness of these internal controls. Based on
the findings, you can make recommendations on how they can be improved.
• 2. Identify potential risks for fraud
Small to mid-sized companies are prone to fraud and theft just as much as large
companies. One of the key benefits of an internal audit is that it ensures a
company has proper governance so that there is no risk of fraud. Some types of
theft that can occur within the company include, misuse of the company card,
tampering of checks or not accounting for customer payments. With the help of an
internal audit, you can create a system of checks and balances to reduce the
misuse of company resources. 34
• 3. Improve efficiency
Internal audits can be used to measure the operations of the company, rather than its
finances. This is also known as an operational audit. It makes sure that the operations of
the business are functioning at its maximum efficiency. When the operations of the
company are inefficient it can lead to high overheads. The internal audit identifies
opportunities to improve operations and lower costs. With a focus on improving the
processes of the company, the organisation can be more dependent on processes rather
than the people.
• 4. Ensure compliance
When evaluating the company’s internal controls, the business can ensure corporate
governance and ethics in all of its accounting processes. This involves ensuring that the
operations are in line with the rules and regulations set forth by the government and
other public entities like GDPR. Compliance rules are constantly changing so it
essential that the company conducts an annual audit to avoid any costly fines in the
future. This regulatory compliance is also a factor that is assessed in the external audit.
Hence, performing this check during the internal audit can help identify any problems
before they are discovered in the external audit. 35
• 5. Improve investor confidence
The role of the internal audit is to assess all the internal controls and highlight any
potential problems that exist within the company. The internal audit team reports
its findings to the executives who can then make decisions based on the results.
Conducting an internal audit improves confidence among the investors of the
company as they are assured that the management is taking the necessary steps to
run the company in the most effective way possible.
• 6. Protect the computer network
With the large amounts of data generated by companies on a daily basis, the safety
of technology plays an important role. Regular internal audits can detect any
vulnerabilities in your computing system that would put the financial data at risk.
It can also help the organisation decide if the existing layer of protection is
sufficient or if there is a need to improve the security protocol for the computer
system with a multi-layered approach. Cyber fraud is one of the biggest threats to
accounting firms since they store large amounts of their client’s confidential data.
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• 7. Quality check
During the internal audit, the assurance team plays a vital role in ensuring
that the accounting processes and corporate governance is in place. The
assurance team ensures that the processes of the company are designed in
the most effective way possible and are in line with the company’s goals. It
works closely with the consulting team who provide recommendations on
how these processes can be further improved to achieve maximum
productivity.

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 What is included in an internal audit?
• An internal auditor ensures that the firm implements the best practices that help
the organisation operate in a smooth and efficient manner. Here are some of
their key duties:
• Identify risks- The main job of the internal auditor is to look at the processes of
the company and identify any key risks or threats while anticipating the future
needs of the business.
• Manage risks- Once the risks have been identified, the next step is to work with
the risk management team to improve the effectiveness of the internal controls.
• Assess operations- This is also known as the operational audit and involves
looking at specific operations in each department and finding ways to improve
them.
• Assurance- The assurance team works closely with the auditors to ensure that
the existing operations make the best possible use of the company’s resources.
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 Advantages of Internal Audit
• 1] More Effective Management
• One of the biggest benefits of an internal audit is that it
facilitates more effective management of the organization.
• The internal auditor will be able to point out any weaknesses
of the organization in the operations or internal controls of the
company.
• So the management can use these insights to better the chances
of achieving their goals.

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 Advantages of Internal Audit
• 2] On going Review
• The process of internal audit gives the organization a unique
opportunity to conduct a review of the performances in the
ongoing year itself.
• They do not have to wait for the end of the year to review the
company’s performance. This also means that if they are not on
the correct path, this will help them change course and correct
their mistakes immediately.

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 Advantages of Internal Audit
• 3] Performances of Staff Improve
• The staff of the company remains alert and active. This is
because there is the fear of their mistakes being caught by the
internal auditor almost immediately.
• This will help improve their efficiency and performance. Also,
they do not attempt to defraud the company for the same
reasons. And on the other hand, it is a good morale booster for
honest employees.

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 Advantages of Internal Audit
• 4] Ensures Optimum Use of Resources
• One other benefit of the process of internal control is that it
can be used as a tool to promote the optimization of resources.
It will help point out the areas in which resources are being
underutilized or wasted. And then these can be corrected. It
will help control the costs and expenses of the company.

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 Advantages of Internal Audit
• 5] Division of Work
• Internal audit helps promote the division of labor. It is
important to keep a check on and observe the activities of all
the departments and all of their employees. Division of labor
will help in achieving this.

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 Limitations of Internal Audit
• 1] Shortage of Qualified Staff
• The work of an audit requires years of study and experience. An
inexperienced auditor can cause more damage than good. So usually,
the company will find it somewhat difficult to find enough qualified
staff members for the process of an internal audit.

• 2] Time Lag
• There will always be a time lag between accounting and auditing.
Internal audit cannot begin till the accounting is complete. They
cannot be done simultaneously. So if the accounting process is
delayed, so is the internal audit.
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 Limitations of Internal Audit
• 3] Ignorance of Management
• Unlike a statutory audit, the findings of an internal audit are not
published or made available to all. Their findings are only forwarded
to the management.
• Now even if an internal audit reports points out to the shortcomings of
the company or the errors in the financial statements, the management
may not take corrective action.
• They can choose to ignore such findings and then there will be no
benefit gained from the internal audit.

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END OF CHAPTER 2

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