Internal control may be defined as the plan of organization and methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies. The phrases “safeguarding its assets” and “accuracy and reliability of accounting data” are referred to as accounting controls, whereas the phrases “promote operational efficiency‟s” and “encourage adherence to prescribed managerial policies are referred to as administrative controls. Administrative controls encompass operational controls such as quality control, work standards, budgetary controls, periodic reporting, policy appraisals, quantitative controls, etc. The auditor of financial statements, however, is primarily concerned with the accounting controls since these have a direct and significant bearing on the reliability of the financial information.
Internal auditing is an independent appraisal function established within an organization. The objective of internal auditing is to assist members of the organization in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analysis, appraisals, recommendations, counsel, and information concerning the activities reviewed. After the internal auditor evaluates the organization‟s internal control system and /or its performance, analysis and recommendation are provided to the top management. Since it contributes to the effectiveness of an organization‟s system of internal control, an organization‟s internal audit department can have a substantial impact on the independent auditor‟s examination of the entity‟s financial statements.