Internal Control Objectives
Internal controls are crucial to understand for the CPA exams. Grasping internal controls can be complex due to the numerous types that exist. Internal controls can vary greatly, so it’s crucial to hold a broad definition.
When discussing a company’s objectives, three goals stand out:
- Operations objectives
- Reporting objectives
- Compliance objectives
Internal controls are any system in place that assists a company in achieving its operations, reporting, or compliance objectives.
Study Tip: Internal controls are any system in place that assists a company in achieving its operations, reporting, or compliance objectives.
First, let’s consider operations objectives. These involve the effectiveness and efficiency of an entity’s operations. This scope covers everything from achieving specific financial goals and maximizing asset use, to protecting against company theft. These comprise the operations objectives.
The next set of company objectives revolves around reporting. This category concerns the reports a company produces, both internal and external. An example of external reports is the company’s financial statements. The company must ensure it is producing financial statements compliant with US GAAP. Proper reporting can accurately depict a company’s performance.
Finally, there are the compliance objectives. This area focuses on adherence to appropriate laws and regulations, which are typically industry-specific. For instance, a healthcare company has specific patient privacy laws to abide by. Understanding compliance involves verifying whether rules are being followed.