Internal Audit and Internal Controls

Today we would be looking at the differences between an internal audit and an internal control system. We would begin with the internal audit and then progress to internal controls and immediately after, check out the functions of each one of them.

Internal Audit

Internal Audit is an independent appraisal activity within an organization for the review of operations as a service to management. It is a managerial control which measures and evaluates the effectiveness of other controls. Internal audit involves assessing, evaluating and testing the internal control system using techniques such as narrative notes for sample systems, flow charts for complex systems and internal control questionnaire. Internal audit provides value to relevant stakeholders including the governing bodies and senior management as an objective source of independent advice.

The scope of internal audit of an organization depends on the organizations policies. It may involve the organization’s governance, risk management and management controls over efficiency or effectiveness of operations, compliance with the relevant laws and regulations and reliability of financial and management reporting.

 

Internal Control

Internal control is a system of control, financial or otherwise established by the management to ensure adherence to policies and ensure that the business is run in an orderly an efficient manner. It is a system of control for safeguarding assets and securing the completeness, accuracy and validity of the company’s financial records. Simply put, it is a means by which an organization’s resources are directed, monitored and measured.   Internal control involves identification and analysis of relevant risks.

The importance ofinternal control for an organization cannot be over emphasized that is why internal control is made a key element of the Foreign Corrupt Practice Act (FCPA) of 1977 and the Sarbanes Oxley Act of 2002. There is requirement for continuous improvement of internal control in United States public corporations

Functions of Internal Audit

The functions of internal audit include:

1. Provision of financial and operating information including detailed tests of transactions and balances for management purposes
2. Review of the existing accounting systems and related internal controls and making recommendations for improvement
3. Review of the economy, efficiency and effectiveness of operations
4. Review of the implementation of corporate policies, plans and procedures
5. Assisting in the design of new accounting systems
6. Special investigations e.g on occurrence of fraud and loss of profit.

Functions of Internal Control

The functions of internal control include:

1. Ensuring the engagement of suitable officials and sufficiently motivating them to perform the right duties and also discharge their functions with complete integrity (personnel control).
2. Ensuring that all transactions are checked for arithmetic accuracy and correctly being processed in the accounting system (Accounting controls)
3. Ensuring that the company’s accounts especially tangible assets are physically secured (Physical control).
4. Ensuring that all transactions are duly authorized and approved by responsible officials within predetermined limits (Authorization and approval control).
5. Controlling business activities with the use of budgets, forecasts and internal audit (Management control).
6. Designing charts to define and allocate responsibilities to officials and identify lines of reporting (Organizational controls).
7. Ensuring that the functions of staff are subjected to independent supervision by superior official (Supervisory control)
8. Ensuring that processing a transaction from inception to completion is done by a single staff. (Segregation of duties control)

Recommended Reading 

O. Ray Whitting.,Wiley CPAexcel Exam Review: Auditing and Attesting