Question

How do you think that the selection of the appropriate preventative, detective and corrective controls applied in a specific situation or business operation should be guided by factors such as the legal obligations of the business, the contractual obligations of the business, the internal culture of the business and the costs of implementing each specific control versus the benefits derived from that control in terms of things such as dollar savings, legal or contractual compliance, goodwill or reputation.

Answer 1

Internal controls are the policies and procedures that a business puts into place in order to protect its assets, ensure its accounting data is correct, maximize the efficiency of its operation and promote an atmosphere of compliance among its employees. There are three main types of internal controls: detective, preventative and corrective.

Detective internal controls are designed to find errors after they have occurred. They serve as part of a checks-and-balances system and to determine how efficient policies are. Examples include surprise cash counts, taking inventory, review and approval of accounting work, internal audits, peer reviews, and enforcement of job descriptions and expectations. Detective internal controls also help protect assets for ex:: if surprise verification of cash held then cashier will be honest at all the position

Preventative internal controls are put into place to keep errors and irregularities from happening certain events . Preventative controls usually occur on a regular basis. They range from locking the building before leaving to entering a password before completing a transaction. Other preventative controls include testing for clerical accuracy, backing up computer data, drug testing of employees, employee screening and training programs, segregation of duties, obtaining approval before processing a transaction and having physical control over assets are some of the examples of the same.

The objective of corrective controls is to correct errors. For example, your company's management team may recommend backing up data in order to recover essential information in the event of a crash or security breach. This type of audit usually includes detective and preventive controls , these take necessary measure to correct the misstatements on due time.

The objectives of internal controls go beyond preventing fraud and theft. When done correctly, they can help reduce risk to the certain, waste and abuse. These audits prove a company's compliance with applicable laws and regulations, protect its resources against loss due to mismanagement and maintain reliable financial data.

Any company big or small can benefit from internal controls. However, small businesses are more vulnerable to fraud and experience higher median loss compared to established companies. Corruption, employee theft and data omission from financial records are common.