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Classification of Internal Control

The document outlines the classification of internal controls into administrative and accounting controls, highlighting their distinct purposes and examples. It details the elements of the internal control structure, general objectives, and essential control activities necessary for effective risk management. Additionally, it discusses evaluation methods for internal controls and the importance of controls in electronic data processing environments.

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Classification of Internal Control

The document outlines the classification of internal controls into administrative and accounting controls, highlighting their distinct purposes and examples. It details the elements of the internal control structure, general objectives, and essential control activities necessary for effective risk management. Additionally, it discusses evaluation methods for internal controls and the importance of controls in electronic data processing environments.

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© © All Rights Reserved
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INTERNAL CONTROL CLASSIFICATION

In a broad sense, Internal Control includes controls that can be


classified as accounting or administrative.

The classification between accounting controls and


administrative controls would vary according to individual
circumstances.

ADMINISTRATIVE CONTROL

Administrative controls comprise the organizational plan and all


methods and procedures related primarily to operational
efficiency and adherence to company policies and are usually -
only indirectly related to financial records. They include
primarily controls such as statistical analysis, motion and time
studies, operations reports, personnel training programs, and
quality controls.

ACCOUNTING CONTROL

Accounting controls comprise the organization plan and all


methods and procedures related primarily and directly to the
safeguarding of the company's assets and the reliability of -
financial records. They generally include controls such as the
system of authorizations and approvals with accounting records
and reports of the duties of operation and custody of assets and
internal auditing.

Example: A requirement that a person whose duties involve


handling money should not also handle accounting records.
Another example is a requirement that checks, purchase orders,
and other documents be prenumbered.

ELEMENTS OF THE INTERNAL CONTROL STRUCTURE

The elements of the Internal Control structure are: -


The Control Environment

- Risk Assessment
- Information and Communication Systems
- Control Procedures - Surveillance

Dividing Internal Control into five elements provides the auditor


with a useful framework for assessing the impact of an entity's
internal controls on the audit. When carrying out the study and
evaluation of Internal Control, the auditor must keep in mind the
following question: How does a specific control affect the
assertions that the company makes in the financial statements?

GENERAL OBJECTIVES OF INTERNAL CONTROL

Internal Control generally seeks the following objectives: -

- Protecting assets
- Verify the accuracy and reliability of financial information
- Promote operational efficiency

CONTROL ACTIVITIES CONSIDERED ESSENTIAL IN A


COMPANY

Control activities are defined as actions established through


policies and procedures that help ensure that management
instructions are carried out to mitigate risks with potential
impact on objectives.

Control activities are executed at all levels of the entity, at


different stages of the business processes and in the
technological environment, and serve as mechanisms to ensure
compliance with the objectives. Depending on their nature, they
can be preventive or detection and can cover a wide range of
manual and automated activities. Control activities form a
fundamental part of the internal control elements. These
activities are aimed at minimizing the risks that hinder the
achievement of the organization's general objectives. Each
control carried out must be in accordance with the risk it
prevents, taking into account that too many controls are as
dangerous as taking excessive risks. These controls allow:

 Prevent the occurrence of unnecessary risks.


 Minimize the impact of the consequences thereof.
 Restore the system in the shortest possible time.

INTERNAL CONTROL EVALUATION METHODS

An easier way to obtain information on the functioning of the


internal control system in an entity may be through inquiry,
observation, review of the organization and functions manuals,
accounting and internal audit manuals, internal work
regulations, internal procedures and instructions and other
provisions adopted by the administration or management; as
well as conversations or interviews with executives about the
constitution, organization, share capital of the company, legal
proceedings, number of workers, etc. However, the most
commonly used means or methods to adequately document the
evaluation of the internal control system in the company and
which at the same time can serve to record that the evaluation
has been carried out are the following methods: descriptive,
questionnaire, graphs or flowcharts.

PREVENTIVE CONTROLS FOR A MANUFACTURING


COMPANY

Mall del Rio Company.

Preventive: When they put up no parking signs in the places


where items are unloaded for the different existing premises

Detective: In places where the floor is slippery and there is no


sign informing about it, this poses risks to customers

Corrective: The cameras that exist in different places in the


Mall help to detect possible risks that will be resolved in the
future.
Manager: In the bathrooms the water taps are open for a
certain time, this helps to avoid wasting water, and there will be
less expenses.

Company "Importadora Tomebamba, Toyota"

Preventive: When they put up signs that say "authorized


personnel only." This helps to ensure that third parties do not
have access to the company's personal belongings.

Detective: When there are no signs informing you not to park,


this will cause problems when taking cars to the municipality's
parking lots.

Corrective: Places where complaints can be filed help detect


possible risks in how customers are treated.

Manager: In the bathrooms, the light is programmed to turn off


when there is no movement, this helps the company pay less for
basic services.

ERCO Company

 Preventive: When they put up signs that say "The


company is not responsible for lost items." This helps the
company avoid problems with lost items.

 Detective: When any of the machines are dangerous and


there is no sign informing about this, it can pose a risk to
staff, making the company the only party responsible.

 Corrective: Detect in time and prevent those gentlemen


who leave their cars in restricted areas, this helps prevent
possible risks and setbacks.

 Manager: The machines are always running, so there are


no damaged items, which helps ensure good and effective
production.
INTERNAL ACCOUNTING CONTROL UNDER PED
ENVIRONMENTS.

Electronic data processing has invaded almost all activities


carried out by companies. Internal control in a PED environment
requires responsible personnel for its implementation and
evaluation, extensive knowledge of control theory, the operation
of computer equipment, and the hardware itself. The main
objective for implementing internal control within the PED
function is to reduce the risk associated with this environment.
PED risk refers to the possibility that information does not
comply with any of its basic characteristics, or that it may be
compromised by access by unauthorized persons.

Need for PED controls.

To mechanize accounting procedures, it is essential to


implement control procedures that take into account the nature
of the information flow. This is due to the need to identify the
way in which information can and is stored or modified in
computer records, in order to determine the nature of the
controls to be implemented. This does not eliminate the
associated risks derived from PED environments, but rather
reduces them.

GENERAL AND SPECIFIC CONTROLS

GENERAL: They do not have an impact on the quality of the


assertions in the financial statements, since they are not related
to the information. Accountant.

SPECIFIC: They are related to the information. Accounting and


therefore with the assertions of the balances of the financial
statements. These types of controls are from the origin of the
information to the final balances.

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