Internal Control is a system of procedures in place to ensure that all business transactions are properly recorded and assets are adequately safeguarded. It is mandatory for the Revenue Officer to evaluate internal control for him to decide up to what extent the system can be relied upon.
A. Principles of Internal Control
Good internal control assures good record keeping and the inability of the employees and the owner from misappropriating the assets.
Some broad principles of internal control are:
- Responsibilities should be clearly
- Adequate records should be
- Assets should be insured and employees
- Record keeping and custody should be
- Responsibility for related transactions should be
- Personnel should be
- Automation should be used whenever
- Employees should be informed of prescribed
- The system should be under constant
B. Elements of Internal Control
Internal control can be divided into three elements:
- Control Environment - this includes the entity’s organizational structure, methods of assigning authority and responsibility, engagement in related-party transactions and compliance with various laws, rules, and regulations.
- Control Procedures - these include the adequate use of documents to ensure the proper recording, valuation and timing of transactions.
C. Standard Procedures in Evaluating Internal Control
To establish the scope of the audit and degree of compliance tests to be performed, internal control should first be evaluated based on the following techniques:
- Identify the personnel responsible for record keeping and determine their responsibilities and authority in the business operation.
- Reconcile the return with the books and records. Difficulty in reconciling the return with the books and records may be an indication of inadequate internal control in either financial or tax accounting.
- Interview responsible company personnel and observe business operations.
- Review the chart of accounts and identify unusual accounts or note those accounts which should be included but not indicated.
- Secure and study copies of operating manuals or instructional booklets that may lead to an easy understanding of the taxpayer’s business operations.
- Determine if the taxpayer’s personal transactions are segregated from business operations or if separate bank accounts are maintained by the owner and the business.
- Determine if bank accounts reconciled monthly.
- Determine the books and records maintained and the frequency of recording transactions.
- Determine if pre-numbered documents are being used.
- Determine the extent of involvement of auditors and other third parties in the business.
- Determine if certified audits for any reason were conducted.
- Determine if the income reported by the taxpayer reflects his lifestyle.
Reference: RAMO 1-2000