Accounting and Internal Control Systems Notes

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

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