Internal Control and Internal Check: Concepts, Objectives, Limitations and Auditor’s Role

Table of Contents

• Overview
• Meaning of internal control
• Objectives of internal control
• Elements/components of internal control (basic)
• Meaning of internal check
• Internal control vs internal check (difference)
• Internal audit (brief) and its relation
• Advantages/importance of internal control
• Limitations of internal control
• Auditor’s role and evaluation of internal control
• Tests of controls vs substantive procedures (intro)
• Internal check in key areas (examples)
• Mini tables/flowcharts for exam answers
• Common exam mistakes
• Key Terms (quick)
• Quick Recap (1-minute revision)

Overview

A strong internal control system reduces errors and frauds and improves reliability of accounts. Auditors study internal control to:

• understand the client’s system,
• assess audit risk,
• and decide the nature and extent of audit procedures.

Internal check is an important part of internal control, based on division of work.

Meaning of internal control

Internal control is the overall system of policies and procedures designed by management to:

• safeguard assets,
• ensure accuracy of records,
• prevent and detect fraud/errors,
• and ensure compliance with laws.

In simple words: internal control is the "control system" inside the business.

Objectives of internal control

Main objectives:

• protection of assets (cash, stock, fixed assets)
• accuracy and completeness of accounting records
• prevention and detection of errors and frauds
• efficiency and orderly conduct of business operations
• compliance with laws, regulations and policies

Elements/components of internal control (basic)

At a basic level, internal control includes:

• Control environment: management attitude, ethics, organisational structure
• Control activities: approvals, authorisation, segregation of duties
• Information and communication: proper recording and reporting
• Monitoring: regular review and internal audit

Exam tip: write 3–5 components.

Meaning of internal check

Internal check is a part of internal control where work is arranged so that:

• one employee’s work is automatically checked by another,
• and no single person completes a transaction from start to end.

It is based on division of work and segregation of duties.

Internal control vs internal check (difference)

Internal audit (brief) and its relation

Internal audit is an independent appraisal activity within an organisation to evaluate operations and controls.

Relationship:

• Internal control is the system.
• Internal check is part of the system.
• Internal audit checks whether the system works properly.

Advantages/importance of internal control

• reduces chances of errors and fraud
• improves accuracy and reliability of accounts
• helps efficient operations and cost control
• ensures proper authorisation and accountability
• builds confidence in stakeholders

Limitations of internal control

Even good controls have limitations:

• management override (top management can bypass controls)
• collusion among employees
• human errors and negligence
• cost-benefit constraint (controls are limited by cost)
• changes in business may make controls outdated

Therefore, internal control provides reasonable assurance, not absolute guarantee.

Auditor’s role and evaluation of internal control

Auditor should:

1. understand internal control system
2. evaluate whether controls are designed properly
3. test whether controls operate effectively (tests of controls)
4. decide audit approach:
   • if controls are strong → less detailed checking may be required
   • if controls are weak → more substantive procedures required

The auditor cannot rely blindly; evaluation is necessary.

Tests of controls vs substantive procedures (intro)

• Tests of controls: check whether controls are working (e.g., approval signatures, segregation).
• Substantive procedures: detect material misstatements directly (vouching, confirmation, verification).

Both are used depending on risk and control strength.

Internal check in key areas (examples)

Examples:

• Cash receipts: one person collects cash, another records, another deposits.
• Purchases: purchase order by one, receipt by another, payment approval by another.
• Sales: sales order approval, dispatch, invoicing and recording by different persons.

The idea is to avoid concentration of power and reduce fraud.

Mini tables/flowcharts for exam answers

Internal control structure (flow):

Policies & procedures → segregation/authorisation → recording & reporting → monitoring/internal audit

Internal control vs internal check (quick):

Common exam mistakes

• Mixing internal check with internal audit.
• Writing only definition and not objectives.
• Saying “strong control means no audit needed” (wrong).

Key Terms (quick)

• Internal control: overall policies and procedures.
• Internal check: automatic checking through division of work.
• Internal audit: independent review of internal controls.
• Management override: bypassing controls.

Quick Recap (1-minute revision)

• Internal control safeguards assets and ensures reliable records.
• Internal check is part of control based on segregation of duties.
• Controls have limits (override, collusion).
• Auditor evaluates controls to plan audit procedures.