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MF0013—Internal Audit and Control


Master of Business Administration- MBA Semester 4

MF0013—Internal Audit and Control-4 Credits

(Book ID: 1759)

Assignment (60 Marks)

Note: Answer all questions (with 300 to 400 words each) must be written within 6-8 pages. Each Question carries 10 marks 6 X 10=60

Q1. Discuss, in brief, the advantages and limitations of auditing.

 Answer. Advantages of an audit

A. We have seen that the need for an external audit in the case of companies arises primarily from the existence of split-up of ownership from control. There are however, certain advantages in having financial statements audited even where no statutory requirement exists for such an audit in the case of a sole-trader-ship, partnership, or non-profit organizations for example. These advantages can be summarized as follows:-


Q2. Explain the key objectives of a good internal audit system. Write down the essentials for effective internal auditing.

Answer. There are five possible objectives that an internal audit might have:

  • To determine whether controls over financial and operating data provide managers with reasonable assurance that the financial and operating data is accurate and reliable (i.e., that information gathering and reporting has been properly planned, organized and directed);
  • To determine whether controls over compliance with policies, procedures, plans, laws and regulations provide managers with reasonable assurance that proper compliance actually occurs (i.e., that compliance activities have been properly planned, organize


Q3. List the required qualifications of an internal auditor. Describe the role of internal auditor in the company’s management.

Answer. This occupation has a level of skill commensurate with a bachelor degree or higher qualification. At least five years of relevant experience may substitute for the formal qualification. In some instances relevant experience and/or on-the-job training may be required in addition to the formal qualification.

Internal Auditor should possess the following qualities:-

  • Accounting principles knowledge
  • Experience


Q4. Explain the basic principles of governing internal control.

Answer. Principles of governing internal control:-


Internal control comprises preventive actions as well as daily and subsequent controls needed to ensure the achievement of business objectives. Internal control plays an active role in company management, administration and daily operations.

Objectives of internal control are:

– Effectiveness and efficiency of operations

– Reliability of financial and operational reporting


Q5. Discuss the specific problems of Electronic Data Processing (EDP) relating to internal control.

Answer. In an EDP system, the following problems arise in the implementation of internal control:

a) Separation of duties:

In a manual system, separate individuals are responsible for initiating transactions, recording transactions, and custody of assets. As a basic control, separation of duties prevents of detects errors and irregularities. In a computer system, however, the traditional notion of separation of duties does not always apply. For example, as program may reconcile a vendor invoice against a receiving document and print a cheque for the amount owed to a creditor. Thus, this program is performing functions that in a manual systems would be considered incompatible.


Q6. Explain the factors for having the effective internal control system for a bank.

Answer. An effective internal control system requires that the material risks that could adversely affect the achievement of the bank’s goals are being recognized and continually assessed. This assessment should cover all risks facing the bank and the consolidated banking organization (that is, credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal risk and reputational risk). Internal controls may need to be revised to appropriately address any new or previously uncontrolled risks.

Banks are in the business of risk-taking. Consequently it is imperative that, as part of an internal control system, these risks are being recognized and continually assessed. From an internal control perspective, a risk assessment should identify and evaluate the internal and external factors that could adversely affect the achievement of the banking

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