Now that we’ve discussed the principles of internal controls, let’s examine the three main purposes of internal controls. Internal controls can prevent an error, detect an error, and correct an error.

First, they can prevent an error. This means that the internal control will identify the error before it even occurs, before the error is input into our system. For instance, imagine we have a customer with poor credit who is applying to make a purchase on credit, which would result in accounts receivable from them. We wouldn’t want to allow them to make this purchase because they might never pay us. Our internal control will automatically deny their request before it’s even entered into our system, preventing this error.

The second purpose of an internal control can be to detect an error. This implies that the error has already occurred and been input into our system. From our example, let’s assume the customer with poor credit is inadvertently approved. Then our system informs us about this error, detecting it. This allows us to take appropriate action to rectify it.

The third purpose of an internal control is to correct an error. This means the error has already occurred and we’ve identified it. We simply need to correct the error now. From our example, we could have an internal control that causes our system to automatically cancel the purchase order placed by the customer with poor credit. In this way, it’s out of our system and is rectified.

Study Tip: Internal controls can prevent, detect, and correct errors.