Internal controls can be characterized as internal administrative controls or internal accounting controls. Internal administrative controls are those procedures and records that can assist management to reach business goals. Internal accounting controls are those procedures and records that are concerned primarily with the reliability of financial records and reports as well as safeguarding of assets.
It is a plan of organization and all of the methods and measures used by a business to monitor assets, prevent fraud, minimize errors, verify correctness and reliability of accounting data, promote operational efficiency and ensure that established managerial policies are followed. Internal control extends to functions beyond accounting and financial departments.
Accounting controls encompass safeguarding assets and the accuracy of financial records. They are designed to give assurance that transactions are properly authorized and are recorded to allow for financial statement preparation. As mentioned earlier, accounting controls deal with maintaining accountability for assets, proper authorization to access assets and periodic reconciliations between recorded assets on books and physical assets that exist.
Administrative or managerial controls deal with operational efficiency, adherence to managerial policies and management’s authorization of transactions. Examples are quality control and employee performance reports. Accounting and administrative controls are not mutually exclusive since some procedures and records falling under accounting control may also be used for administrative control. An essential ingredient in maintaining internal control is internal audit function. The external auditor must carefully evaluate the internal control system as a basis to determine the degree of audit procedures necessary in the circumstances.