Accounting and Internal Control Systems Notes
Introduction
The topic considers the auditor’s interests in both accounting
systems and internal control systems. The auditor has a lot interest in
accounting and internal control systems since their adequacy will be
vital. Strong systems of accounting and internal control are reliable.
Auditor’s Interest in Accounting System
The auditor has a lot of interest in the client’s accounting systems due to:
- The auditor should ascertain the enterprise’s system of recording
and processing transactions and asses its adequacy as a basis for
the preparation of financial statements - The auditor has a duty, in preparing their report carry out
investigations so as to enable them form an opinion.
Whether proper accounting records and accounts have been maintained or
not it is duty of the auditor to make an opinion in his report.
Management’s Interest in Accounting System
The management of a business enterprise requires that complete and
accurate accounting books and other records are maintained due to the
following reasons:
- The business operations are easy to control when proper books and
records are maintained - Day to day records of debtors and creditors are indispensable
- Assets and other resources are easily safeguarded
- It is easy to prepare reliable and accurate financial statements if
and only proper books of accounts are maintenance - It is a statutory requirements to maintain these accounting records
and books What constitutes an adequate system of accounting depends
upon a number of factors such complexity of the organisation, nature
of the business and other factors.
Importance of Accounting Control System
A system of accounting and record keeping will only succeed if there are
strong internal control systems. The purposes of these controls are:
- To ensure that all transactions are recorded properly
- Errors and irregularities are avoided
- Assets and liabilities are recorded at their correct values
Internal Control System
Internal control may be defined as “the whole system of control,
financial or otherwise, established by the management in order to carry
on the business of the enterprise in an orderly and efficient way,
ensure adherence to the management policies, and safeguard the assets
and secure as far as possible the completeness and accuracy of records”
Types of Internal Controls
The types of internal controls are categorized as follows:
- Organisation
An enterprise should have a proper allocation of responsibility to
key departments and functions. The
enterprise should establish a good plan of organisation popularly
known as organisation chart which should among other things identify
lines of reporting. Employees should always know precisely to whom
they report and who reports to them. The employees should their
accountability and responsibility. - Segregation of Duties
Of maximum importance from an internal control standpoint is
segregation of duties where no one single person should be given too
much powers especially regarding recording, approval and custody of
transactions. Several people should be involved in a single
transaction to avoid fraud and collusions. - Physical
This concerns the physical custody and access to the company’s
assets and other resources. Access may be direct or indirect such as
through documentation and other authorization. The access may be
through other authorization such as through password and other
restrictions. - Authorization and Approval
This is a special type of physical custody whereby the employee must
be authorization through documentation to perform a specified task.
For instance all credit sales must be approved and authorized before
the transaction goes through. - Arithmetical and Accounting
This involves the physical checking of the arithmetical and
accounting accuracy. It is important for instance to cross check
balance before the close of the day. - Personnel
Procedures should be designed to ensure that personnel operating the
system are competent and have the requisite skill to carry out the
necessary operations. The personnel must be of high integrity and
high training and expertise. The management should put in place the
necessary measures to hire, fire, and train, promote and remunerate
well the personnel in their employment. - Supervision
All the actions of an enterprise must be supervised by well
qualified personnel. The responsibility and accountability of both
the supervisor and the supervised must precisely stated and known to
both. - Management
These are controls exercised by the management which are outside and
over and above the day to day routine of the system. They include
overall supervisory controls, review of the management accounts,
variance analysis, internal audits and any other special review
procedures.
Importance of Internal Controls
Internal control system is of paramount important in any business
enterprise. The following are the reasons why the system is important:
- Enables management to carry out the business in an orderly and
efficiently - Internal controls lay down the various procedures to be followed in
conducting business transactions. - Ensures adherence to management policies
- The controls lay down the procedures to be flowed in the conduct of
business. In simple terms the management policies are explained
through the internal controls - Safeguards the company assets
- Internal controls are designed to ensure that the resources and
assets of the company are protected from fraud, theft and embezzlement. - Ensures completeness of and accuracy of records
The companies’ Act cap 486 requires that the business enterprise
must keep proper books of accounts besides financial statements - Helps in preventing and detecting errors
Strong internal controls assists in preventing and detecting errors. It
is the responsibility of the management to prevent and detect errors.
This is achieved through continuous review of the books of accounts such
internal audits variance analysis etc. Helps in compliance of the
necessary legislation and regulations Internal controls assists in
ensuring that the business complies with applicable regulations and
legislations
