Module No. 2: Risk Assessment and Internal Control
5 marks
1. What are the objectives of Internal Check system?
In the words of Ronald Arish ' internal check refers to the organisation of office duties in
such a way as to prevent or disclose both error and fraud'.
Objectives of internal control system
1 allocation of duties: internal check aim at allocation of duty among the accounting
staff of the organisation depending upon their qualification experience and efficiency .
2 . Fixing the responsibility: once a duties are allocated to all the employees responsible
are fixed on every employee of the concern in such a way that every employee would be
held accountable for a particular error or fraud committed by him.
3. Maximization of errors and fraud: once a main objective of internal check system is to
maximize the possibility of committee errors and fraud or irregularities by the people in
the organisation.
4. Detective of errors and frauds : despite the best efforts of the organisation to prevent
errors or frauds , there could be a few error and frauds committed by the dishonest
employees.
5. Ensure reliability of book of accounts: internal check system facilitates recording of all
business transactions in a systematic way which will ensure the realiability and
dependability of the books of accounts and other records by the people who depend on
such Books of accounts..
6. Easy and early preparation of final account: the internal check system intends to
maintain the books of accounts in a systematic way lending to the easy and early
preparation of final account of the concern within the stipulated time.
7. Increase in overall efficiency of the employees: the internal check aims at enhancing
the overall efficiency of all the employees who are engaged in the recording of business
transactions with a view to increasing their productivity and minimizing the cost of
operations.
8. Exercise moral pressure: one of the significant objectives of internal check is to Exert
moral pressure on the employees to deter them from committing error and frauds since
there is independent checking of work done by each employee by the other
2. Explain the internal check system as regards purchases.
Internal Check as regards Purchases
A separate department for credit purchases is usually maintained in business houses.
The efficiency of such a department depends upon its policy of purchasing best goods at
, the cheapest price. To facilitate its operation, the whole work connected with purchases
may be divided into five heads:
1. Assessment of requirements.
2. Enquiry
3. Placing orders.
4. Receipt of goods
5. Recording and making payments
1. Assessment of Requirements: To assess the requirements of goods, requisition books should
be issued to the various departments of a concern. The head of the department which is in
need of goods should fill in a requisition slip duly signed and then send it to the purchases
department.
2.Enquiry:Then, the purchases department makes an enquiry about the terms and conditions of
purchases from different suppliers. For this, tenders or quotations are invited from them.
3. Placing Orders:The purchases department places orders which should be recorded in the
purchases order book. Three copies of such orders should be prepared-one each for the
supplier, the store and the purchases department itself. A responsible officer should sign the
order.
4. Receipt of Goods : On receipt of goods, the gate keeper should enter the particulars of all
goods received in the Goods inward book after having checked them properly. The goods then
should be sent to the store where they should be carefully preserved. The stores department
should prepare a "Goods Received Note' and send a copy there of to the purchase department,
the Accounts department and the Production Control department.
5. Recording and Making Payments : Lastly, the Purchases department should scrutinize the
requisition slip, the order, the goods received note and the invoice, Invoices are usually checked
by Invoice clerk. The number of the order should be entered on the invoice. The invoice should
then be handed over to the Accounts department where steps will be taken to make payments
3. What is Audit Risk? Explain Auditors responsibility to consider fraud and errors in audit
of financial statements (5 marks)
"Audit risk is the risk that auditor expresses an inappropriate audit opinion, when the
financial statements are materially misstated".
Aditors responsibility to consider fraud and error in auit of financial statement
→ understanding of fraud and Error
→ professional attitude
5 marks
1. What are the objectives of Internal Check system?
In the words of Ronald Arish ' internal check refers to the organisation of office duties in
such a way as to prevent or disclose both error and fraud'.
Objectives of internal control system
1 allocation of duties: internal check aim at allocation of duty among the accounting
staff of the organisation depending upon their qualification experience and efficiency .
2 . Fixing the responsibility: once a duties are allocated to all the employees responsible
are fixed on every employee of the concern in such a way that every employee would be
held accountable for a particular error or fraud committed by him.
3. Maximization of errors and fraud: once a main objective of internal check system is to
maximize the possibility of committee errors and fraud or irregularities by the people in
the organisation.
4. Detective of errors and frauds : despite the best efforts of the organisation to prevent
errors or frauds , there could be a few error and frauds committed by the dishonest
employees.
5. Ensure reliability of book of accounts: internal check system facilitates recording of all
business transactions in a systematic way which will ensure the realiability and
dependability of the books of accounts and other records by the people who depend on
such Books of accounts..
6. Easy and early preparation of final account: the internal check system intends to
maintain the books of accounts in a systematic way lending to the easy and early
preparation of final account of the concern within the stipulated time.
7. Increase in overall efficiency of the employees: the internal check aims at enhancing
the overall efficiency of all the employees who are engaged in the recording of business
transactions with a view to increasing their productivity and minimizing the cost of
operations.
8. Exercise moral pressure: one of the significant objectives of internal check is to Exert
moral pressure on the employees to deter them from committing error and frauds since
there is independent checking of work done by each employee by the other
2. Explain the internal check system as regards purchases.
Internal Check as regards Purchases
A separate department for credit purchases is usually maintained in business houses.
The efficiency of such a department depends upon its policy of purchasing best goods at
, the cheapest price. To facilitate its operation, the whole work connected with purchases
may be divided into five heads:
1. Assessment of requirements.
2. Enquiry
3. Placing orders.
4. Receipt of goods
5. Recording and making payments
1. Assessment of Requirements: To assess the requirements of goods, requisition books should
be issued to the various departments of a concern. The head of the department which is in
need of goods should fill in a requisition slip duly signed and then send it to the purchases
department.
2.Enquiry:Then, the purchases department makes an enquiry about the terms and conditions of
purchases from different suppliers. For this, tenders or quotations are invited from them.
3. Placing Orders:The purchases department places orders which should be recorded in the
purchases order book. Three copies of such orders should be prepared-one each for the
supplier, the store and the purchases department itself. A responsible officer should sign the
order.
4. Receipt of Goods : On receipt of goods, the gate keeper should enter the particulars of all
goods received in the Goods inward book after having checked them properly. The goods then
should be sent to the store where they should be carefully preserved. The stores department
should prepare a "Goods Received Note' and send a copy there of to the purchase department,
the Accounts department and the Production Control department.
5. Recording and Making Payments : Lastly, the Purchases department should scrutinize the
requisition slip, the order, the goods received note and the invoice, Invoices are usually checked
by Invoice clerk. The number of the order should be entered on the invoice. The invoice should
then be handed over to the Accounts department where steps will be taken to make payments
3. What is Audit Risk? Explain Auditors responsibility to consider fraud and errors in audit
of financial statements (5 marks)
"Audit risk is the risk that auditor expresses an inappropriate audit opinion, when the
financial statements are materially misstated".
Aditors responsibility to consider fraud and error in auit of financial statement
→ understanding of fraud and Error
→ professional attitude
