Internal Control
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Internal control is the immune system of a business, and it gets its own dedicated coverage on the AUD section of the CPA exam.
What is internal control?
Internal control is the web of policies, procedures, and practices a company deploys to ensure the accuracy of its financial reporting, safeguard its assets, and maintain compliance with legal guidelines. Auditors assess a company's internal control system to determine how much reliance they can place on it, then tailor their audit approach based on that evaluation.
What are the three core objectives of internal control?
- Reliability of financial reporting — ensuring the financials are free from material misstatement
- Effectiveness and efficiency of operations — optimizing the use of resources
- Compliance with laws and regulations — making sure the company adheres to applicable laws
Example: A retail business with several cash registers uses a dual-custody arrangement, where every cash count at the end of the day is verified by two employees rather than one. This control reduces the risk of theft or fraud. If you, as an auditor, find this control effective, you may decide to perform fewer substantive tests on the cash account — saving time and resources.
Strong internal controls let an auditor rely more on the company's own processes and do less direct testing. The stronger the control — like requiring two people to verify a cash count — the more an auditor can scale back substantive procedures in that area.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.