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.