INTERNAL CONTROL AND AUDIT IN MICROFINANCE

WHAT IS INTERNAL CONTROL

Internal control indicates the whole system of controls employed by the management in the conduct of the business. It includes internal check, internal audit and other forms of controls. Its efficient working in practical aspect is helpful not only for the management but also for the external authorities. It includes all the methods followed by an organization to : (a) Protect its assets against their improper disbursement. (b) Protect against the incurrence of improper liabilities. (c) Assure the accuracy and dependability of all the financial and operating information. (d) Judge operating efficiency, and (e) Above all, measure the adherence to established policies of the company.

Internal control system means all polices and procedures adopted by the management of an entity to assist in achieving management’s objective of ensuring as far as practible, the orderly and efficiency conduct of its business, including adherence to management polices, the safeguard of assets, the prevention and detection of fraud and errors, the accuracy and completeness of the accounting records and timely preparing of reliable financial informations.

PRINCIPLES OF INTERNAL CONTROL AND IMPORTANCE

To safeguard its assets and enhance the accuracy and reliability of its accounting records, a company follows specific control principles. Of course, internal control measures vary with the size and nature of the business and with management’s control philosophy. However, the six principles listed in applied to most enterprises: (a) Establishment of responsibility (b) Physical, Mechanical and Electronic controls. (c) Segregated of duties. (d) Independent internal verification. (e) Documentation Procedures. (f) Other controls.

a Establishment of responsibilities : An essential characteristics of internal control is the assignment of responsibility to specific individuals. Control is most effective when only one person is responsible for a given task. In case of cash transactions only one person is responsible for this purpose. If only one person has operated the register, responsibility for the shortage can be assessed quickly. However, if two or more individuals have worked the register it may be impossible to determine who is responsible for the error. Establishing responsibility includes the authorization and approval of transaction.

b) Segregation of duties : This principle is identified as separation of functions or division of work. There are common applications of this principles. 1. The responsibility for related activities should be assigned to different individuals. 2. The responsibilities for establishing the accountability (keeping the records) for an asset should be separated from the physical custody of the asset. 3. The rationale for segregation of duties is that the work of one employee should, without a duplication of efforts, provide a reliable basis of evaluating the work of another employee.

c) Documentation procedure : Documentation provide evidence that transactions and events have occurred. Documents should be prenumbered and all documents should be accounted for. Prenumbering helps to prevent a transaction from being recorded more than once, or conversely, to prevent the transactions from not being recorded. The documents that are sources documents for accounting entries should be properly forwarded to the accounting department to help ensure timely recording to the transaction and event. Thus, this control measure contributes directly to the accuracy and reliability of the accounting records.

d) Physical, Mechanical and electronic control : Use of Physical, Mechanical and Electronic control is essential. Physical control related to primarily to the safeguarding of assets. Mechanical and Electrical controls safeguard assets and enhance the accuracy and reliability of the accounting records. Safes, vaults and safety deposit box for cash and business papers; locked warehouses and storage cabinet for inventories and computer facilities with pass key access are example of physical control. Mechanical and electronic control are alarm to prevent break instrument; television monitors is to detect theft, and time clocks for recording time worked.

e) Independent internal verification : Most system of internal control provides for independent internal verification. This principle involves the review comparision, and reconciliation of data prepared by one or several employees. The verification should be made periodically or surprise basis. Independent internal verification is especially useful in comparing recorded accountability with existing assets. The reconciliation of the cash book with bank balance etc.

f) Other control : Other control measure includes the following : 1) Bonding of employees who handling cash bonding involves obtaining insurance protection against misappropriation of assets by dishonest employees. This measures contributes to the safeguarding of cash in two ways : First, the insurance company carefully screens all individuals before adding them to the policy and may reject risky applicants. Second, bonded employees know that the insurance company will vigorously prosecute all offenders. 2) Rotating employee’s duties and employees to take vacations. These measures are designed to deter employees from attempting any theft since they will not be able to permanently concern their inproper actions. Many bank embezzlements have been discovered when the perpetrator has been on vacation or assigned to a new position.