ADVANTAGES AND DISADVANTAGES OF INTERNAL CONTROL SYSTEM
Advantages of ICS to the Auditor
a) ICS will reduce the amount of audit work to be done in so far as the auditor will be able to use systems based audits to apply tests which will facilitate his audit work.
b) A strong ICS will minimise chances of errors and frauds, and the introduction of inter-checking supervision and improved custody will in turn minimise liabilities to third parties, who would have depended on his opinion with greater surety and speed.
c) Will reduce the amount of audit evidence to be gathered, because it will facilitate reaching and using a greater variety of audit evidence available within the business. This will enable him to form an opinion with greater surety and speed.
d) The presence of an internal check system strengthens the credibility of audit evidence gathered.
e) ICS minimises the work load and the time need to take in order to produce his report.
f) The preparation of an ICS will identify those areas prone to errors and frauds, which will enable the auditor to plan his audit work so that he allocates more time and effort to those areas where for organisational reasons the internal check system is weakest.
g) ICS emphasises the use of control accounts thus assuring the auditor of up to date account reconciliation information which will facilitate his examinations.
h) ICS enables him reduce the sample size to be tested and thus facilitate his ability to carry out as many varied audit checks as possible.
i) ICS can only be strong normally with support of a strong internal audit function which in turn enables the auditor to use internal auditor’s work to facilitate his work.
j) A strong ICS boosts accountability which depends on clearly segregated and defined duties and responsibilities and this will enable the auditor to know who to contact in case of difficulties.
k) It also helps him to give quality advice to management; this in turn may minimise his work load in future audits.
l) ICS enables the auditor to have greater knowledge of his client’s business and facilitates the drawing up of a balanced audit opinion.
Disadvantages of ICS to the Auditor
1. The management may over rely on the strength of the ICS and therefore relax their supervision which may leave room for errors and frauds thus exposing the auditor to potential civil liabilities.
2. The presence of ICS may lead to the auditor reducing the volume of examination carried out which may lead to smaller samples of data thus leaving other areas to possibilities of errors and frauds which may expose him to civil liabilities.
3. It may be frustrated by management through collusion and manipulation which may mislead the auditor’s opinion leading to biased reports.
4. The presence of ICS is supposed to minimise the auditor’s volume of tests but not his liabilities which means that its strength may leave some errors and frauds undetected due to relaxed tests. This will increase his liabilities. ICS may be manipulated so that errors and frauds by the management cannot be easily detected and this may lead to a biased opinion.
5. ICS may reduce the auditor’s vigilance and observations with an unfavourable effect on the quality of the audit.
6. ICS may be abused by the internal auditors through collusion with the management and this may lead to the external auditor being mislead.
Advantages of ICS to the Client
a. Safeguarding client’s assets against:
a) Misuse
b) Misappropriation
c) Manipulations
d) Abuse of the Company’s assets (for reasons that will not benefit the Company)
e) Facilitates optimal use of the Company’s assets.
b. Reduces audit fees. This is because less audit work is needed and less audit staff.
Increased efficiency through management supervision and a defined organisation chart. Routine and automatic checks also increase efficiency.
c. Chances of errors and frauds are minimised.
d. This ensures minimum losses, facilitates audit work and hence early reports and attainment of budgeted performance.
e. Facilitates corrective measures in so far as the objectives of the business are better defined and therefore the facilities available can be suitably directed to their achievements.
f. Facilitates up to date records.
g. This is advantageous in that is prompts decisions through feed back to management which helps detect irregularities.
h. Leads to balanced opinion (unqualified report) improving public opinion of the business.
i. This helps in raising finances by selling shares through public sale and improving investment
implementation.
j. It boosts morale of staff through motivation of supervision. This may lead to high output and high profitability.
k. ICS helps in the redress of disastrous decisions especially in high risk situation. This is done through close application of management controls in development situations.
l. ICS assists in the co-ordination of operations. This is done through definition of duties and responsibilities of all employees and it boosts efficiency in the:
1. Carrying out of operations,
2. Efficiency in delegation,
3. Efficiency in execution.
Disadvantages of ICS to the Client
a. ICS is expensive to install and maintain. For example, the physical control security systems require qualified personnel to maintain them and constant servicing.
b. ICS could lead to a problem of over reliance on the ICS. This may lead to relaxation in supervision and allow manipulation of accounts and assets and can also bring about inefficiencies. Maintaining controls requires constancy and consistency.
c. If not well instituted it may encourage over staffing.
d. Rigid implementation may lead to a slowdown in the operation of the business.
e. The ICS requires continuos updating as the organisation changes, if not the ICS may become increasingly obsolete.
f. Use of wrong controls may expose the Company to more problems, e.g. errors and frauds. These are more easily perpetrated if the ICS used is inappropriate.
g. ICS may be frustrated if through changes in company organisation the checks become uncoordinated.
