Question

In: Accounting

Think to a position that you have held at either your workplace, or volunteer organization.. Compare...

Think to a position that you have held at either your workplace, or volunteer organization.. Compare the following three types of controls: preventative, detective, and corrective. Give two examples of each type of control that you have experienced. Of the three, in your opinion which one do auditors usually focus on more in an audit?

Solutions

Expert Solution

There are three types of internal controls :

  • Preventive control - These are the controls to which are required to prevent any type of fraud or misstatement being made or error being made, before it actully occurs. These control help in recognising them before they take place. Example of these types of control are - 1) All the documents of transactions and their data are made to be restored properly and they are made to processed accurately for recording transactions, which helps in preventing any error in transaction being recored and thus prevents wrong financial reports. 2) Separation of duties is yet another example of this. This would lead to have a proper check on work of each employee because of which it would not be possible to do manipulations and hence prevent any type of fraud in the organization.
  • Detective controls - They are the controls to find or detect if any kind of fraud or mistake has been committed in the making of financial statements. It occurs when an uncertain activity cannot be prevented earlier.

Examples of this are :

1) Doing audits is the best example I'd the detective controls. Running an audit detects where the error has occurred. This is the most effective way of detecting the errors.

2) reconciliations is yet another way to detect fraud as it checks that money leaving and account is entering other account. This means one accout is debited then another is credited. This way errors are detected.

  • Corrective controls - These are the controls to correct those errors which are being detected before it leads to any further loss. Examples of this are :   

1) reporting problem to the management and making required changes against the error. Example if a particular transaction has been intentionally omitted, it should be reported and also should be added in the accounts and make a fresh report with corrections.

2) running training program would help in correcting problem that has occurred. It should be taught and made to learn how to tackle such problems and accordingly employees should now make changes after learning from these programs.

These were the three internal controls along with their example.

In the audit, auditors more focus on detective controls as audit is to recognise the errors or frauds which is being occurred. Audit helps to find those errors and report to the management further.

Therefore for auditing, this detective control is the most important.


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