CAT / FIA FBT Syllabus C. Accounting And Reporting Systems, Controls - Internal Financial Controls - Notes 2 / 6
The purpose of internal control is implied to help management achieve the entity’s objectives
Especially in terms of ensuring:
the orderly and efficient conduct of the business
the safeguarding of assets
the prevention and detection of fraud and error
the accuracy and completeness of the accounting records, and
the timely preparation of reliable financial information.
The importance of internal controls
Internal controls are there to prevent risks occurring or to minimise the impact of risks (i.e. to help prevent things going wrong).
Even when controls are in place documents may still get lost or portable assets may go missing.
The level and extent of internal controls required depend on what the risks are if such controls fail.
It is particularly important that stringent controls exist where there are associated legal requirements.
Most internal controls are of great interest to the external auditor.
If internal controls are believed to be very reliable from the external auditor point of view, that will mean that the amount of substantive testing (tests to identify errors and omissions in financial records) of transactions and resultant balances in the ledger accounts will be reduced.
Internal controls are fundamental to internal auditors.
They have to make decisions on the extent of reliance on controls to manage risks to provide assurance that the corporate governance requirements as being met.