Internal control is a set of internally generated policies and procedures adopted by the management of an enterprise which is pre requisite for an organization‟s efficient and effective performance. It is thus a primary responsibility of every management to create and maintained adequate system of internal control appropriate to the size and nature of the business entity.
The system of internal control as the process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity‟s objectives with regard to reliability of financial reporting, effectiveness & efficiency of operations, safeguarding of assets and compliance with applicable laws & regulations.
The auditor needs to obtain the same degree of assurance in order to given an unqualified opinion on the financial statements of both small & large entities. However many controls which would be relevant to large entities are not practical in small business. For example, in a small business, accounting procedure may be performed by a few persons.
Small business is characterized by the lower number of employees, minimum investment of capital, small capacity of production, difficulty to segregate the owner and the management and there is less use of technology. It means the business is producing the product (if it is a manufacturing industry) manually using very less mechanical tools and traditional tools.
Like, another characteristic is the simplicity and local products designed to cover up the local environment. It is highly labour intensive and less machine oriented in nature. Also the business is dependent with the skill labour instead of installing high value of machine.
Those persons may have both operating and custodial responsibilities and segregation of function may be missing or severely limited.
Inadequate segregation of duties, may in some cases, is offset by supervisory controls exercised by the owner. The supervisory function by the owner becomes possible because of the fact that he has direct personal knowledge of the business and involvement in the business transactions.
In circumstances where segregation of duties is limited and the evidence of supervisory controls is lacking the evidence necessary to support the auditors opinion on the financial information may have to be obtained largely through substantive procedure.