Internal Control – Meaning, Objectives, Scope, Limitations. As per SA-315, the internal control may be defined as “The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives. Now you can scroll down below and check more details from below….
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Internal Control
The plan of organization and all the methods and procedures adopted by the management of anentity to assist in achieving the management’s objective of ensuring, as far as practicable, theorderly and efficient conduct of its business, including adherence to management policies, thesafeguarding of assets, prevention and detection of fraud and error, the accuracy and completenessof the accounting records and the preparation of reliable financial information.
Objectives of Internal control
- Transactions are executed in accordance with management’s general or specificauthorizations.
- Transactions are carried efficiently and effectively.
- All transactions are promptly recorded so as to permit preparation of financial informationwithin a framework of recognized accounting policies and practices and relevant statutoryrequirement if any, and to maintain accountability for assets.
- Assets are safeguarded from unauthorized access, use or disposition
- The recorded assets are compared with the existing assets at reasonable intervals andappropriate action is taken with regard to any differences.
Scope of Internal control
It extends beyond accounting controls. Basically internal controls can be classified into two broadcategories:
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(i) Accounting controls
(ii) Administrative controls
Accounting controls primarily aim at provision and timely preparation of reliable financialinformation by strictly following the procedures and broad policies envisaged by the management.Whereas administrative controls include all other managerial controls concerned with the decision makingprocess. e.g. Preparation and maintenance of approved /registered Vendors’ register.
Limitations of Internal control
- The organizational structure of the entity may not be such as to have an effective system.
- Lack of Management supervision, frequent follow-up measures and so on.
- Management’s perception of cost related to internal control
- Lack of integrity, interest on the part of the personnel bound to follow the systems.
- Abuse of power, like a member of management overriding a control.
- Control system may become redundant with passage of time.
- Collusion between two or more persons may not be prevented.
- Manipulation by management itself with respect to transactions or estimates, judgements inpreparation of financial statements.
- The potential for human error.
- Most controls tend towards transaction of usual nature.
The inherent limitations of Internal Control are –
| Cost | Management’s consideration that a control be cost-effective. |
| Unusualtransactions | The fact that most controls do not tend to be directed at transactionsof unusual nature. |
| Error | The potential for human error. |
| Collusion | The possibility of circumvention of controls through collusion withparties outside the entity or with employees of entity |
| Abuse ofauthority | The possibility that a person responsible for exercising control couldabuse that authority, e.g. a member of Management overriding acontrol |
| Inadequacy | The possibility that procedures may become inadequate due to changesin conditions and compliance with procedures may deteriorate |
| Manipulations | Manipulations by Management with respect to transactions or estimatesand judgments required in the preparation of Financial Statements |
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