WHAT IS INTERNAL CONTROL

PROCESS DESIGNED AND IMPLEMENTED BY MANAGEMENT TO

PREVENT, DETECT & TO ACHIEVE FINANCIAL

MAXIMISE PROFIT REPORTING OBJECTIVE
CORRECT ERROR & FRAUD

HOW TO ACHIEVE THE ABOVE?

CONTROL ACTIVITIES

AUTHORISATION & SEGREGATION OF INFORMATION PHYSICAL CONTROL

APPROVAL DUTIES PROCESSING

CUSTOMER
SALES ACCOUNTS
WAREHOUSE
RELATIVE CREDIT LOW PRICE DEPARTMENT DEPARTMENT FINANCE
SALES ORDER DEPARTMENT Record JV
SALES INVOICE
AUTHORISED CUSTOMERS LIST GDN
AUTHORISED PRICE LIST
AUTHORISED CREDIT LIST

PURCHASE
DEPARTMENT
 INTERNAL CONTROLS PURHASE CYCLE

RISK
Suppliers are not authorized

CONTROL OBJECTIVE
Suppliers should be authorized

CONTROL ACTIVITY
Authorised Supplier list. All purchase orders should include
reference to approved supplier
PLACING
ORDERS TEST OF CONTROL
TO Inspect purchase order and trace the name of Supplier to
SUPPLIERS authorized supplier list
CONTROL WEAKNESS
No authorized supplier list

RECOMMENDATION
There shall be an authorized supplier list

POSSIBLE EFFECT
Fraud –purchases made from unauthorized supplier such
as relatives, friends on unfavaourble terms.
 INTERNAL CONTROLS PURHASE CYCLE
RISK
Orders are over looked and are not processed

CONTROL OBJECTIVE
Every order should be duly processed

CONTROL ACTIVITY production department ny inform krdiya k raw material chahiye pr purchase dept ny order over looked krdiya

Purchase orders are sequentially numbered

PLACING
ORDERS TEST OF CONTROL
TO Obtain a sample from purchase order ensure that Purchase
SUPPLIERS Order are sequentially numbered
CONTROL WEAKNESS
Purchase order are not sequentially numbered

RECOMMENDATION
Purchase order should be sequentially numbered

POSSIBLE EFFECT material nhi aye ga to goods tayyar nhi hongi or sales delay hongi
Maximise profit – Company might not process the order
timely and due to the delay it can cause operational delays
and financial loss
 INTERNAL CONTROLS PURHASE CYCLE
RISK
Orders are processed twice

CONTROL OBJECTIVE
Each order should be processed only once

CONTROL ACTIVITY
Orders should be recorded on sequentially numbered
purchase order.
PLACING
ORDERS TEST OF CONTROL
TO Obtain a sample from purchase order ensure that Purchase
SUPPLIERS Order are sequentially numbered.
CONTROL WEAKNESS
No sequential pre- numbering / Overlapping or duplicate
purchase order number
RECOMMENDATION
Purchase order should be sequentially numbered

POSSIBLE EFFECT
Maximise profit and fraud – One purchase order might be
processed twice / supplier might send goods twice. Excess
holding cost and risk of obsolete inventory
 INTERNAL CONTROLS PURHASE CYCLE
RISK
Purchase order might not be approved

CONTROL OBJECTIVE
Purchase order should be duly authorized / approved by
Purchase manager (or relevant hierarchy)
CONTROL ACTIVITY
Segregation of Duties - All the purchase order are prepared
by one person (purchase clerk) and approved by senior
person (purchase manager)
PLACING
ORDERS TEST OF CONTROL
TO Obtain a sample of purchase order and check whether the
SUPPLIERS orders are duly approved by the purchase manager
CONTROL WEAKNESS
Purchase order are not signed and approved by head of
purchase department / manager
RECOMMENDATION
There must be a segregation duty every purchase order
authorised by the head of the purchase department

POSSIBLE EFFECT
Fraud andprofit
Maximise error – unauthorized
and fraud – Onepurchases
purchase might be made
order might be
without approval
processed twice /or there might
supplier mightbe an error
send goods intwice.
purchase
Excess
order which
holding costmight goofobsolete
and risk undetected.
inventory
 INTERNAL CONTROLS PURHASE CYCLE
RISK
For large orders, suppliers are not asked to submit tenders

CONTROL OBJECTIVE
Competitive tenders/quotation should be sought from
different suppliers for optimum purchase cost

CONTROL ACTIVITY
Obtain quotations /bidding from suppliers

PLACING TEST OF CONTROL

ORDERS Obtain a sample of purchase order and check whether
TO orders are duly approved and are supported by
SUPPLIERS competitive bids.
CONTROL WEAKNESS
Quotations/biddings are not obtained from suppliers

RECOMMENDATION
Quotations/biddings must obtained from suppliers

POSSIBLE EFFECT apni mrzxi k ksi supplier sy purchases krli apna commision bna liya or higher rate pr purcjhases krli

Profit maximization and fraud: Risk of un-optimized

purchases. Causing the company for goods/services at
higher rates and low quality
 INTERNAL CONTROLS PURHASE CYCLE
RISK
When suppliers are asked to submit tender, the higher
quotation might be selected without any authentic and
genuine reason or approval.
CONTROL OBJECTIVE
Lowest price quotation should be selected for optimized
purchases unless specific quality reason

CONTROL ACTIVITY
The purchase manager should confirm that the lowest price
quotation is selected for purchase order unless there is a
PLACING specific reason which is appropriately documented and
ORDERS approved by senior management
TO TEST OF CONTROL
SUPPLIERS Obtain a sample of large purchase order and check from
bidding documents to ensure that whether lowest price was
selected
CONTROL WEAKNESS lack of SOD

Lowest price quotation might not be selected

POSSIBLE EFFECT
Profit maximization and fraud: Risk of un-optimized
purchases. Causing the company for goods/services at
higher rates and low quality
 INTERNAL CONTROLS PURHASE CYCLE
RISK
Goods may be accepted from a supplier without having been ordered or
suppliers may claim to have delivered goods, but may actually not have
done
CONTROL OBJECTIVE
Goods only received from authorised purchases
CONTROL ACTIVITY
A copy of all delivery notes should be retained, with a signature of the
member of staff who took receipt and checked the goods. Sequentially
pre-numbered goods received notes should be produced for each
RECEIVING delivery, from the delivery note or after a physical count of the items
GOODS AND received
INVOICING TEST OF CONTROL
The auditor should check that segregation of duties exist between the
person checking the goods against delivery note and person preparing
GRN. On a sample basis check from a series of GRN that it is sequentially
pre-numbered. Observe the last three receipts and check whether Goods
Receive Notes is being prepared for every inward of stock
CONTROL WEAKNESS
Goods Received Note is not prepared, Goods Received Note is not
sequentially pre- numbered, No segregation of duties
RECOMMENDATION
GRN shall be prepared, authorized and sequentially numbered

POSSIBLE EFFECT
Maximize profit / Fraud or error – The company might pay for
goods / services not received
 INTERNAL CONTROLS PURHASE CYCLE

RISK
The Company may fail to claim discounts from suppliers for orders
above a certain size, or as regular customers of the supplier

CONTROL OBJECTIVE
Discounts are availed by company where these are available

CONTROL ACTIVITY
A member of the accounts staff or purchasing staff must be
RECEIVING responsible for checking discounts allowed by suppliers
GOODS AND
INVOICING TEST OF CONTROL
On a sample basis check from documentary evidence (i.e. supplier
agreement) that discounts are checked and claimed from suppliers,
when available

CONTROL WEAKNESS
Discounts available are not properly monitored to be claimed

POSSIBLE EFFECT
RECOMMENDATION
Maximize profit – Company will pay more than what should be paid.
 INTERNAL CONTROLS PURHASE CYCLE
RISK
Suppliers may invoice for goods that have not actually been
provided
CONTROL OBJECTIVE
To prevent recording and payment of invoices when goods /
service not received
CONTROL ACTIVITY
All purchase invoices should be checked against a valid and
approved purchase order and a signed goods received note,
RECEIVING before recording and payment
GOODS AND
INVOICING TEST OF CONTROL
On sample basis, trace invoices to corresponding GRN and
PURCHASE ORDER to ensure that payments are made against
those goods that has been ordered and received.
CONTROL WEAKNESS
Invoices are not matched with GRN and PURCHASE ORDER by the
accounts department
RECOMMENDATION
Match supplier invoice with GRN and purchase order
POSSIBLE EFFECT
Maximise profit – Invoices might be recorded and paid for goods
/service not received or recived less than ordered.
 INTERNAL CONTROLS PURHASE CYCLE
RISK
Purchase invoices will be incorrectly recorded in the accounts of
suppliers
CONTROL OBJECTIVE
Purchase invoices should be recorded in the correct account of
supplier
CONTROL ACTIVITY
SOD + Regular statements should be received from suppliers, and
RECORDING
AND
the balance on the statement should be checked against the
ACCOUNTING account balance in the trade payables ledger and regular control
FOR account reconciliations for trade payables should be performed.
PURCHASES
AND TEST OF CONTROL
EXPENSES On a sample basis check whether supplier reconciliations and
control account reconciliations are regularly prepared and reviewed
CONTROL WEAKNESS
Supplier statement not being requested.
Reconciliations are not prepared and/or reviewed.
Reconciliations prepared but differences are not
properly recorded.
POSSIBLE EFFECT
Fraud or error– by posting invoices in other supplier account, the
company might pay a supplier for which the company is not obliged
to pay for
 INTERNAL CONTROLS PURHASE CYCLE
RISK
There is a risk that invoices and credit notes may not be recorded in
the accounting system.
CONTROL OBJECTIVE
Invoices and credit notes are completely recorded in the accounting
system
CONTROL ACTIVITY
RECORDING Invoices and credit notes should be sequentially numbered and
AND forward to finance department. Finance Department shall record the
ACCOUNTING sales and receivable in Journal Vocher which is sequentially
FOR numbered Segregation of Duties – JV must be signed and approved
PURCHASES
AND
by Head of finance department.
EXPENSES
TEST OF CONTROL
Inspect Journal vocher to ensure that it is sequentially numbered
and signed by head of finance department.
CONTROL WEAKNESS
Journal Vocher is not prepared Not sequentially numbered Not
signed by Head of finance department
POSSIBLE EFFECT
FRO – Sales and account receivable may be materially misstated