When it comes to accounting, there are two main categories of internal controls: preventive and detection. Preventive controls are designed to reduce the risk of errors and irregularities occurring, while detection controls are used to identify any issues that may have already occurred. Both types of controls are essential for an effective internal control system. Preventive internal controls are established to prevent any adverse events from happening.
This includes things like risk assessments, procedures, reports, and communication. Segregation of functions is also a key part of preventive internal control from an administrative point of view. Detection controls, on the other hand, are used to highlight any issues in a company's accounting process. Examples of detection controls include inventory counting, internal audits, surprise cash counts, and physical audits (such as counting money by hand).
These types of controls protect a company's assets by detecting errors when they occur, so that business owners can minimize their impact on the company. Corrective internal controls are also important for addressing any errors that have been found by the detective internal controls. This type of control generally begins by detecting unwanted outcomes and keeping the focus on the problem until management can resolve it. If an error occurs, it is essential that the employee follows established procedures to correct the error.
Implementing a quality improvement team can be a great way to address current issues and correct processes. It is also important to review and analyze internal controls on an ongoing basis as part of any organization's annual security practices. Standardizing accounting documents such as inventory receipts, invoices, requests for internal materials, and travel expense reports can help maintain consistency in business records. When data is processed, various internal controls are performed to verify the accuracy, integrity and authorization of transactions.Internal controls significantly reduce the risk of asset loss and increase the reliability and accuracy of all your accounting and financial operations.
They are also responsible for ensuring that other areas of the internal control framework are addressed in a coherent manner. The human element is error-prone and malicious parties can and will find weak points in any organization's control procedures.Overall, preventive and detection internal controls are essential for an effective internal control system. They help protect a company's assets by detecting errors when they occur and preventing them from happening in the first place.