Internal Control – Accounting, Administrative Controls

Internal control areas spread over accounting and non-accounting spheres. Internal control, as it applied to the accounting system, implies control over accounting system to achieve the following objectives:

1.      Efficient and orderly conduct of accounting transactions.

2.      Safeguarding the assets in adherence to management policy.

3.      Prevention of error, detection of an error.

4.      Prevention of fraud, detection of fraud.

5.      Ensuring accuracy, completeness, reliability, and timely preparation of accounting data.

On the other hand, administrative controls seek to achieve the aim of management inefficient and orderly conduct of transactions in non-accounting areas.

It seeks to ensure adherence to management policy in various areas of business operations.

For example, in a manufacturing system of a business enterprise, the internal control may be established to ensure the adherence of management policy as to quality (quality control) safeguarding assets (control over wastages, ABC control over raw materials) prevention of errors (monitoring production methods, maintenance program for machines), prevention of frauds (security system) and timely supply of reliable management information (MIS).

If a good internal control system exists in the accounting system, an auditor can put greater reliance on the financial data generated in the system with a test checking of select items.

If the accounting control is not strong, the auditor may have to resort to a detailed checking of transactions, events, and practices in the accounting system.

Concerning administrative controls, the auditor may evaluate those parts of administrative controls as may have a bearing on the financial information of the entity.

For example, before certifying the valuation of stocks, the auditor may refer to the reports of consumption patterns prepared by the manufacturing segment to administration, if the auditor feels material discrepancy in the physical quantity of stocks.

On the other hand, he may not be concerned no more than a matter of general interest with the quality report of chemical A used in operation X.