Internal controls are the physical elements, rules, and procedures that a firm implements to safeguard its assets, financial and accounting data, encourage responsibility, and prevent fraud. Internal controls also refer to the steps taken by a firm to guarantee that its personnel follow all applicable rules and regulations and do not steal corporate property. Internal controls include physical controls such as door locks, area limitations, safes, and surveillance devices.
Advantages of Internal Control System to Auditor
1. In the sense that the auditor will be able to employ systems-based audits to apply tests, Internal Control System will reduce the amount of audit work that needs to be done.
2. A robust Internal Control System will reduce the likelihood of errors and frauds, and the implementation of inter-checking supervision and improved custody will reduce liabilities to third parties who would have relied on his judgement with greater certainty and speed.
3. It will lower the amount of audit evidence required since it will make it easier to access and use a wider range of audit evidence within the company. This will allow him to create more confident and quick decisions.
4. The presence of an internal check mechanism adds to the trustworthiness of audit evidence acquired.
5. Internal Control System reduces the amount of labour and time required to complete his report.
6. The construction of an Internal Control System will highlight areas prone to errors and frauds, allowing the auditor to arrange his audit work so that he may devote extra time and effort to those sectors where the internal check system is the weakest due to organisational factors.
7. Internal Control System emphasises the use of control accounts, ensuring that the auditor gets up-to-date account reconciliation information to help him with his audits.
8. Internal Control System allows him to limit the sample size to be tested, allowing him to do as many different audit tests as possible.
9. Internal Control System can only be strong with the help of a strong internal audit function, which allows the auditor to use the work of the internal auditor to help him.
10. A robust Internal Control System improves accountability by ensuring that jobs and responsibilities are clearly segregated and defined, allowing the auditor to know who to contact in the event of a problem.
Disadvantages of Internal Control System to Auditor
1. The management may place too much faith in the Internal Control System's strength and hence relax their monitoring, allowing for errors and frauds to occur, thus exposing the auditor to civil liability.
2. The presence of Internal Control System may cause the auditor to reduce the volume of examinations performed, resulting in smaller samples of data, exposing other areas to the risk of errors and frauds, thereby exposing him to civil liability.
3. Management may frustrate it by collaboration and manipulation, causing the auditor's opinion to be skewed, resulting in biassed reports.
4. The presence of Internal Control System is expected to reduce the auditor's number of tests but not his liabilities, which indicates that its strength may allow some errors and frauds to slip through the cracks due to inadequate testing. His obligations will grow as a result of this. Internal Control System can be manipulated in such a way that management errors and frauds go undetected, resulting in a biassed view.
5. Internal Control System may lower the auditor's alertness and observations, negatively impacting the audit quality.
6. Internal auditors may misuse Internal Control System in conjunction with management, which could lead to the external auditor being misled.
Advantages of Internal Control System to Client
1. Audit fees are reduced. This is due to the fact that there is less audit work to be done and fewer audit employees to be hired. Enhanced efficiency as a result of management oversight and a well-defined organisational plan. Routine and automatic checks improve efficiency as well.
2. The likelihood of errors and fraud is reduced.
3. This guarantees that losses are kept to a minimum, that audit work is made easier, and that early reporting and budgeted performance are achieved.
4. Facilitates corrective measures insofar as the business's objectives are more clearly defined, allowing the available resources to be better directed toward achieving them.
5. Allows for up-to-date records.
6. This is useful in that it motivates decisions through management feedback, which aids in the detection of abnormalities.
7. Produces a balanced view (unqualified report) that improves public perception of the company.
8. This aids in the raising of funds by selling shares in a public offering and increasing investment execution.
9. It improves employee morale by motivating supervisors. This could result in a high output and profit margin.
10. Internal Control System aids in the reversal of bad actions, particularly in high-risk situations. This is accomplished by employing stringent management controls in developing scenarios.
Disadvantages of Internal Control System to Client
1. Installing and maintaining an Internal Control System system is costly. Physical control security systems, for example, necessitate qualified employees to maintain and service them on a regular basis.
2. Over-reliance on the ICS could be a concern with Internal Control System. This may result in a relaxation of oversight, allowing for the manipulation of accounts and assets, as well as inefficiencies.
3. Consistency and consistency are required to maintain controls.
4. If not properly implemented, it may encourage excessive staffing.
5. Strict implementation may cause a lag in corporate operations.
6. The Internal Control System must be updated on a regular basis as the organisation changes; otherwise, the Internal Control System will become progressively antiquated.
7. Incorrect controls may expose the Company to additional issues, such as errors and frauds. If the Internal Control System utilised is ineffective, they are more easily perpetuated.
8. If the checks become disjointed as a result of changes in the company's structure, Internal Control System may be frustrated.