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

Question 1

Define internal control.

Accepted Answer

**Internal control** is the system of policies and procedures to **safeguard assets** and ensure **reliable accounting records**.

Question 2

What is internal check?

Accepted Answer

**Internal check** is an arrangement where one employee’s work is automatically checked by another through **segregation of duties**.

Question 3

State one objective of internal control.

Accepted Answer

One objective is **prevention and detection of errors and frauds**.

Question 4

What is management override?

Accepted Answer

**Management override** is when top management bypasses established controls.

Question 5

What are tests of controls?

Accepted Answer

**Tests of controls** are procedures to check whether internal controls are operating effectively.

Question 6

What are substantive procedures?

Accepted Answer

**Substantive procedures** are audit procedures to detect **material misstatements** directly.

Question 7

Explain objectives of internal control (any five).

Accepted Answer

Objectives of **internal control** (any five):
- **Safeguarding of assets**.
- **Accuracy and completeness** of records.
- **Prevention/detection** of errors and frauds.
- **Efficiency** and orderly conduct of business.
- **Compliance** with laws and policies.

These objectives improve reliability of financial statements.

Question 8

Differentiate between internal control and internal check.

Accepted Answer

**Internal control** is the broad system of policies, procedures and monitoring to safeguard assets and ensure reliable records. **Internal check** is a part of internal control based mainly on **segregation of duties** so that one person’s work is checked by another.

| Basis | Control | Check |
|---|---|---|
| Scope | broad | narrow/part |
| Focus | overall system | cross-check |

Thus internal check is a technique within internal control.

Question 9

Explain limitations of internal control (any three).

Accepted Answer

Limitations (any three):
- **Management override** can bypass controls.
- **Collusion** among employees can defeat segregation of duties.
- **Human error** and negligence.
- **Cost-benefit** limitation (controls cannot be unlimited).

Hence internal control gives reasonable, not absolute, assurance.

Question 10

Explain the role of auditor in evaluation of internal control.

Accepted Answer

Auditor’s role includes: (1) understanding the internal control system, (2) evaluating design of controls, (3) performing **tests of controls** to check effectiveness, and (4) deciding extent of substantive procedures based on control strength.

Strong controls allow more reliance; weak controls require more detailed checking.

Question 11

Distinguish between tests of controls and substantive procedures.

Accepted Answer

**Tests of controls** check whether internal controls are operating effectively (e.g., approval checks, segregation). **Substantive procedures** directly detect misstatements in transactions/balances (e.g., vouching, confirmation, verification).

Controls tests support reliance; substantive procedures provide direct evidence.

Question 12

Give examples of internal check in any two areas.

Accepted Answer

Examples of **internal check**:
1) **Cash receipts**: collection, recording and depositing done by different persons.
2) **Purchases**: purchase order, goods receipt and payment approval separated.

Separation reduces fraud risk and ensures automatic checking.

Question 13

Define internal control and explain its objectives. Add a simple flowchart of components.

Accepted Answer

**Internal control** is the overall system of policies and procedures designed by management to **safeguard assets**, ensure **accuracy of records**, and prevent/detect **errors and frauds**.

### **Objectives**
- **Protection of assets** (cash, inventory, fixed assets)
- **Accurate & complete records**
- **Prevention/detection** of errors and frauds
- **Efficiency** and orderly operations
- **Compliance** with laws and policies

```text
Control environment → Control activities (segregation/authorisation)
→ Recording & communication → Monitoring/internal audit
```

Thus, internal control improves reliability, but it provides only reasonable assurance.

Question 14

Differentiate between internal control and internal check. Add examples in a table.

Accepted Answer

### **Internal control vs Internal check**
| Basis | **Internal control** | **Internal check** |
|---|---|---|
| Scope | broad system | part of internal control |
| Includes | policies, procedures, monitoring | segregation of duties & cross-check |
| Purpose | overall safeguarding & reliability | automatic checking to reduce errors |

### **Examples of internal check**
| Area | Internal check arrangement |
|---|---|
| Cash receipts | collection, recording, deposit by different persons |
| Purchases | order, receipt, payment approval separated |
| Sales | order approval, dispatch, invoicing separated |

So, internal check is a specific technique within the wider internal control framework.

Question 15

Explain auditor’s role in internal control evaluation. Also differentiate tests of controls and substantive procedures with a table.

Accepted Answer

### **Auditor’s role in internal control evaluation**
Auditor must not rely blindly on controls. The role includes:

1) **Understanding** internal control system (process walkthroughs).
2) **Evaluating design**: whether controls are properly designed to prevent/detect errors.
3) **Testing operating effectiveness** (**tests of controls**): check whether controls worked throughout the period.
4) **Deciding audit approach**:
   - Strong controls → more reliance, less detailed checking.
   - Weak controls → more **substantive procedures** (vouching, confirmation, verification).

### Tests of controls vs substantive procedures (mini table)
| Item | **Tests of controls** | **Substantive procedures** |
|---|---|---|
| Goal | check controls are working | detect misstatements directly |
| Examples | approval checks, segregation checks | vouching, confirmations |

Thus, internal control evaluation helps the auditor plan the nature, timing and extent of audit work.

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

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