The Concept of Internal Control System: Theoretical Aspect

Department of Finance & Banking
(5 th Batch)
Assignment on:
Internal Control and Review Theory
SUBMITTED TO:
Sutapa Chowdury
Assistant Professor
Dept. of Finance & Banking, Comilla University
SUBMITTED BY:
Table of Content
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Name:ID:
Rabeya Basri(Leader) 11817051
Tisha Saha 11817034
Imtias Uddin 11817009
Priya Saha 11817013
Sumi Khandakar 11817045
Tumpa Akter 11817011

1.Introduction...................................................................................................03
2.Objectives of the study..................................................................................03
3.Methodology..................................................................................................03
4.Limitations of the study.................................................................................03
5.Client and Auditor concerns..........................................................................03
7.Components of Internal Control....................................................................05
6.Procedures to obtain understanding of internal control.................................08
7.Assess control risk..........................................................................................10
8.Recommendation............................................................................................12
9.Conclusion.......................................................................................................12
10.Reference.......................................................................................................13
Internal Control and Review Theory
Introduction
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Internal controls system includes a set of rules, policies, and procedures an organization
implements to provide direction, increase efficiency and strengthen adherence to policies. IN
other sense, Internal controls are the mechanisms, rules, and procedures implemented by a
company to ensure the integrity of financial and accounting information, promote
accountability and prevent fraud. Besides complying with laws and regulations, and
preventing employees from stealing assets or committing fraud, internal controls can help
improve operational efficiency by improving the accuracy and timeliness of financial
reporting.
Objectives of the study
This study helps to know about the importance of internal control in auditing. In this study,
we came to know about client and auditor concerns, procedures to obtain understanding of
internal control, assess control risk.
Methodology
This research is executed based on secondary data was collected from different sources,
websites, reports, prospectus, journals etc.
Limitation of the study
We are lucky to get a chance to prepare a report on “Consumer Protection Law of
Bangladesh“. We tried hart and soul to prepare a well informed report. But unfortunately, we
face some difficulties when preparing this assignment. We tried to overcome the difficulties.
In spite of trying our level best, some difficulties that hamper our schedule report work:“ The major problem we have faced is lack of understanding.“ As the data is collected from secondary sources, there was very little opportunity to
analysis data.“ Time constraint is one of the problems, for which it has been difficult for us to gather
enough knowledge.
Client and Auditor concerns
Client concerns:
A system of internal control consists of policies and procedures designed to provide
management with reasonable assurance that the company achieves its objectives and goals.
These policies and procedures are often called controls, and collectively they comprise the
entity's internal control. An understanding of internal control, especially those controls
related to the reliability of financial reporting, are important to the auditor's purposes.
Reliability of Financial Reporting: Management is responsible for preparing financial
statements for investors, creditors, and other users. Management has both a legal and
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professional responsibility to be sure that the information is fairly prepared in accordance
with reporting requirements such as GAAP.
Efficiency and Effectiveness of Operations: Controls within an organization are meant to
encourage efficient and effective use of its resources, including personnel, to optimize the
company's goals. An important part of these controls is accurate information for internal
decision making. A variety of information is used for making critical business decisions.
Another important part of effectiveness and efficiency is safeguarding assets and records. The
physical assets of a company can be stolen, misused, or accidentally destroyed unless they are
protected by adequate controls. The same is true of nonphysical assets such as accounts
receivable, important documents (confidential government contracts), and records (general
ledger and journals),. Safeguarding certain assets and records has become increasingly
important since the advent of computer systems. Large amounts of information stored on
computer media can be destroyed if care is not taken to protect them. Safeguarding of
accounting records also affects the reliability of financial reporting.
Compliance with Applicable Laws and Regulations : Organizations are required to follow
many laws and regulations. Some are only indirectly related to accounting. Examples include
environmental protection and civil rights laws. Others are closely related to accounting, such
as income tax regulations and fraud. One important law affecting all companies subject to the
Securities and Exchange Act of 1934 is the Foreign Corrupt Practices Act of 1977. This law,
which amended the securities acts, requires that a company maintain proper record-keeping
systems. A proper record-keeping system is one that allows the preparation of reliable
external financial statements and prevents off-the-books slush funds and payment of bribes.
Auditor Concerns:
Controls Related to the Reliability of Financial Reporting : To comply with the second
standard of field work, the auditor is interested primarily in controls that relate to the first of
management's internal control concerns: reliability of financial reporting, This is the fairness
of the financial statements. Internal controls, if properly designed and implemented survey by
KPMG (seep. 291) indicate that about half of the typical frauds are detected by internal
controls It has already been stated that auditors should emphasize controls concerned with the
reliability of data for external reporting purposes, but controls affecting internal management
information, such as budgets and internal performance reports, should not be completely
ignored .These types of information are often important sources of evidence in helping the
auditor decide whether the financial statements are fairly presented. If the controls over these
internal reports are considered inadequate, the value of the reports as evidence diminishes.
Controls over Classes of Transactions: The primary emphasis by auditors is on internal
control over classes of transactions rather than account balances: The reason is that the
accuracy of the output of the accounting system (account balances) is heavily dependent on
the accuracy of the inputs and processing (transactions). When gaining an understanding of
internal control and assessing control risk, auditors are primarily concerned with the
transaction-related audit objectives. While gaining an understanding of internal control and
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