Class 10 Account (Office Management and Accounting)

The mechanism of internal policies, rules, and working procedures designed and put in place by the management of an organization or office — to effectively achieve its set goals and objectives, to maximize the utilization of available resources, and to prevent errors and fraudulent activities within the organization — is called Internal Control. It binds all the financial, administrative, and managerial activities of the organization within a defined framework of discipline. The stronger the internal control system, the more reliable the organization’s accounting system is considered to be.

The main components of an effective Internal Control system are as follows:

• 1. Control Environment: The management’s working style, the integrity of the employees, and the ethical values and moral standards of the organization as a whole.
• 2. Risk Assessment: The identification and analysis of internal and external risks that may arise in achieving the organization’s goals and objectives.
• 3. Control Activities: The rules, segregation of duties, and authorization (approval requirements) put in place to minimize identified risks.
• 4. Information and Communication: An effective information flow system that ensures the right information reaches the right person at the right time.
• 5. Monitoring: Continuous supervision carried out to ensure that the internal control system is functioning properly and remains effective over time.

The main objectives of conducting an Audit are as follows:

• Examination of Legal Compliance: To check whether all financial transactions have been carried out within the limits set by the prevailing laws, rules, and budget provisions.
• Verification of Theoretical Accuracy: To examine whether the Generally Accepted Accounting Principles (GAAP) have been fully followed while maintaining the books of accounts.
• Portraying the True Financial Position: To review whether the organization’s Balance Sheet and Profit & Loss Account provide a true and fair picture of the organization’s actual financial condition.
• Detection of Errors and Fraud: To identify errors resulting from employee negligence or intentional frauds and misappropriations, and to provide recommendations for corrective action.
• Promoting Transparency and Accountability: To encourage economy, efficiency, and transparency in the management and utilization of public and organizational resources.

The main reasons why any organization must conduct an Internal Audit are as follows:

• Continuous Monitoring: Since regular checks are carried out while financial transactions are still ongoing, errors can be detected and corrected immediately, preventing them from accumulating.
• Moral Pressure on Employees: The knowledge that an audit can take place at any time creates a moral check on employees, encouraging them to work with integrity and discouraging dishonest practices.
• Protection of Assets: It ensures the protection of the organization’s cash, inventory (store items), and other assets from misuse or misappropriation.
• Ease of Final Audit: Because Internal Audit corrects errors beforehand, the external (final) audit conducted at the end of the financial year becomes faster, more efficient, and simpler to complete.

Final Audit: The process of conducting a comprehensive examination of all financial transactions of an entire financial year after its close, and then having an independent and authorized external auditor certify that the financial statements are lawful and present a true and fair view of the organization’s financial position, is called Final Audit.

Its Necessity:

• To Certify Accuracy and Reliability: To assure all stakeholders (shareholders, the government, and the general public) that the prepared financial statements are true and fair.
• For Tax Assessment: Because the accurate assessment and determination of taxes payable to the state can only be based on audited profit and loss statements, the final audit is a prerequisite for taxation.
• To Fulfill Legal Obligations: Because prevailing laws (such as the Companies Act) make it mandatory for every organization to have a final audit conducted every year, it is necessary to fulfill this legal obligation.

Internal Control is an important system that guides any organization in the right direction and ensures the protection of its resources. To make this system effective, management puts various procedures in place, which can be discussed in detail as follows:

• 1. Segregation of Duties (Division of Responsibility and Authority): The same person should not have the authority to approve a transaction, maintain the records for it, and also take custody of the related cash or assets. Allowing one person to do all three significantly increases the risk of fraud. Therefore, duties must be divided among different employees so that each step is checked by someone other than the person who performed it.
• 2. Authorization and Approval: Before any financial transaction or expenditure takes place, there must be a mandatory requirement to obtain prior approval or sanction from the authorized officer within the prescribed financial limits. No payment or commitment should be made without this formal authorization.
• 3. Physical Control and Security: The organization’s cash, checkbooks, important documents, and store items must be kept in a secure location or safe (locker), and strict procedures must be put in place to prevent unauthorized persons from gaining access to them.
• 4. Independent Checks and Review: A system must be established where work performed by one employee is regularly checked and verified by another independent employee. Regular reconciliation activities, such as Bank Reconciliation, must also be performed as part of this control.
• 5. Adequate Records and Documentation: Procedures must be adopted to securely maintain bills, vouchers, and receipts that can be used to verify each and every transaction, and to keep the accounting books updated on a daily basis so that there is always a complete and accurate paper trail.

Introduction to Auditing:
The scientific examination and investigation of the financial records, vouchers, and financial statements maintained in a business or office — conducted by an independent and qualified person to determine whether they are correct and accurate in accordance with the prevailing laws and generally accepted accounting principles — is called Auditing.

Principles of Auditing:
The fundamental rules that an auditor must follow while performing their duties are called the Principles of Auditing:

• 1. Honesty and Objectivity (Impartiality): The auditor must be completely loyal to their profession. They must express their opinion in a neutral and impartial manner without being influenced or pressured by anyone — whether management, clients, or any other party.
• 2. Confidentiality (Secrecy): Important and confidential financial information of the organization obtained during the course of the audit must not be disclosed by the auditor to any unauthorized third party. This information is to be used solely for the purpose of the audit.
• 3. Evidence-based (Sufficiency of Proof): The auditor must draw their conclusions only on the basis of solid and sufficient documentary evidence — such as bills, vouchers, and bank statements — and not merely on the basis of assumptions or verbal claims.
• 4. Planning and Procedure: Before starting the audit, a systematic Audit Plan must be prepared by taking into account the size, nature, and internal control system of the organization. This ensures that the audit is conducted efficiently and no important areas are overlooked.
• 5. Consistency: The auditor must check whether the organization has been using the same accounting methods and rates each year (for example, the method and rate for calculating depreciation), as inconsistency in accounting methods can distort the comparability of financial statements.

Although both Internal Audit and Final Audit aim to identify errors and certify accuracy, the following key differences exist between the two:

To make Nepal’s government financial administration transparent and accountable, there is a two-stage audit system — Internal Audit and Final Audit — as described below:

1. Internal Audit:
In Nepal, the Internal Audit of government offices is conducted by the District Treasury Controller Office (DTCO) at the federal level, and by the Provincial Comptroller’s Office at the provincial level. Working under the supervision of the Financial Comptroller General Office (FCGO), the staff members of the DTCO visit government offices periodically (usually quarterly) during the year. They check whether expenditures have been made within the approved budget limits, whether the law has been complied with, and whether the records and books have been properly maintained. If any irregularity or error is found, they issue immediate instructions for correction.

2. Final Audit:
In Nepal, the sole constitutional authority to conduct the Final Audit of all government offices (Federal, Provincial, and Local level) and constitutional bodies is vested in the Office of the Auditor General (OAG). After the end of each financial year, independent auditors appointed by the Auditor General evaluate all government expenditures on the basis of regularity, economy, efficiency, and effectiveness, in accordance with government auditing standards. The Final Audit Report prepared by these auditors — which also includes irregularities (Beruju) — is submitted to the President, and is subsequently deliberated upon and discussed in Parliament.