Internal control
From Wikicpa
The internal control system within an organization functions as a monitoring system assuring that certain steps and activities are being carried out as required. In a business environment, management installs the internal controls it considers necessary to proper flow of documents and information that the management requires to run the company.
History
The importance of internal controls was recognized by the AICPA in 1949 when it defined the term as:
- "the plan of organization and all of the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed management policies"
In 1958 the AICPA clarified the definition of internal controls to emphasize that it was composed of two elements, the first administrative controls, the second being accounting controls. The AICPA defines administrative controls to include the plan of organization and the procedures and records that are concerned with the decision processes leading to management's authorization of transactions. Contrasted with the internal accounting controls which provide assurance that transactions are executed in accordance with managements authorization; transactions are recored as necessary; access to records and company assets are permitted in following managements authorization and the records are reviewed for accountability and reasonable intervals.
Principal concepts
- Managing and directing individuals
- Assessing the risk of error
- Assessing the probability of error
- Providing for reasonable assurance of error prevention
- Providing for reasonable assurance error detection
- Recognizing system limitations
