Internal Control on Audit Process

• Definition of Internal Control

In the Accounting Theory, internal control can be defined as a process, which is influenced by human resources and information technology systems, which are designed to assist organizations in achieving a particular goal or objective.

In short, the definition of internal control is the way of human resources who helped by information technology to make sure that the organization or entity is running based on the goal that will be achieved by the organization itself and also to detect the fraud that might happen so that they can minimize it.

• The Purpose of Internal Control

To ensure the management of organization or entity to ensure that:

1. The goals set will be achieved.

2. The financial statements produced by the organization can be trusted

3. The oganization activities is running in accordance with the applicable laws and regulations.

4.  Prevent loss or waste processing resources by the organization.

5. Provide information on how to assess the performance of the company and the management company as well as provide information that will be used as a guide in planning.

• Why Internal Control is Important in Auditing Process?

In my opinion, internal control is important in the auditing process because to audit an entity, at first the auditor must know  the internal conditions itself in that entity, whether the management control is  good, monitoring among the members of is running well, whether the company has been carrying out its activities in accordance of laws and regulation which is existing or not, or the financial statements that produced absolutely true which is no miss calculation or fraud, and etc. To know the information of intern conditions of the entity that being audited, the auditor may know it by internal control of the entity itself. If the entity's internal control is good, then the work result and its financial statements can be justified. However, if the internal control of the entity is not good, then the auditor must do the extra work to find for evidence, in case of that entity have been operated out of the control, laws, and regulations. Internal control itself can help the auditor to obtain information that will be used as a planning guide in the assessment that will be given to shareholders. In addition, it is impractical for the auditor to perform auditing in whole or in detail for almost all of thr entity’s transactions in a limited time and cost.

• How to Test the Internal Control of an Entity?

To test whether the internal control in an entity is  running well or not, the entity should make a restrictions for the size of what things  will be controlled or in other words, entity must have an SOP (standard operating procedures) in carrying out their work activities. For example, if the entity want to control the management members in their attendance, the entity must prepare the tools absence and make a limit of how many times that  members can do absence within a year. Another example, in making a product, an entity must have a limit to how much resources will be used in making the product itself so that it can be clearly measured and minimize loss of resoures.

References:
- https://pcaobus.org/Standards/Auditing/pages/auditing_standard_5.aspx
- https://uiowa.edu/audit/what-are-internal-controls

Created by:
Lalita Nadya Amalia
C1L014014
International Accounting
Jenderal Soedirman University