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Internal Controls

Internal controls lessen the probability that fraud or errors will occur. Controls are often created after an error or a theft is detected. Why? To make sure the misstatement or fraud doesn’t happen again.

Strong internal controls help ensure that financial statements are materially correct. Controls can be preventive or detective. That is, they can assist in keeping mistakes or fraud from happening or they can detect issues after they occur. Preventive controls tend to be more expensive and labor intensive as compared to the detective controls.

Auditors gain an understanding of internal controls in order to design their audit procedures. So, auditors usually perform walkthroughs of significant transaction cycles and account balances to see if controls are designed appropriately and that they have been implemented, that is, that they are in use.

If controls are properly designed and implemented, auditors can test them for effectiveness and use the test to support a lower control risk. Lower controls risk can lessen the risk of material misstatement for an account balance or transaction area.

Auditors are required to report significant deficiencies and material weaknesses in internal controls. That communication must be in writing.

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Charles Hall

Charles Hall

I am a practicing CPA. I have primarily audited governments, nonprofits, and small businesses for the last forty years.

My sweet spot is governmental and nonprofit fraud prevention. I am the author of (1) Journal Entries Made Easy,  (2) The Little Book of Local Government Fraud Prevention, (3) Preparation of Financial Statements & Compilation Engagements, (4) The Why and How of Auditing, and (5) Audit Risk Assessment Made Easy. I frequently speak at continuing education events.

I consult with CPA firms, assisting them with auditing and accounting issues. Contact Charles

More About Me
  • Books
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Book: Journal Entries Made Easy, an Introduction to Accounting
Book: The Little Book of Local Government Fraud Prevention
Book: Preparation of Financial Statements & Compilation Engagements
Book: Audit Risk Assessment Made Easy: Seeing What Others Miss
Book: The Why And How Of Auditing: Auditing Made Easy
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