All companies operate by means of numerous systems that carry out designated tasks, such as the collection of cash and the payment of purchases. These systems need to be well designed and operating as intended to reduce the chance of material misstatements. Additional policies and procedures are included at important junctures in the construction of these systems to ensure that they function appropriately. All such safeguards make up the company’s internal control system. The independent auditor evaluates the quality of the internal control found in the various systems. If the risk of material misstatement has been reduced as a result of the internal control in a particular system, less audit testing is required.
1Some internal controls have nothing to do with a company’s financial statement accounts and are not of
importance to the work of the independent auditor. For example, a company might establish a review procedure
to ensure that only deserving employees receive promotions. This guideline is an important internal control for
the operating effectiveness of the company. However, it does not relate to a reported account balance and is not
evaluated by the independent auditor.
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