Taxonomization of internal controls and errors for audit research;

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A Taxonomization of Internal Controls and Errors for Audit Research
Miklos A. Vasarhelyi*
Columbia University
The Foreign Corrupt Practices Act (FCPA) of 1977 and the advent of in­creased
electronic data processing in organizations have focused increased atten­tion
on management's responsibility to establish and maintain adequate systems of internal accounting controls.
The Act requires organizations to maintain a system of internal accounting controls to provide reasonable assurances that
—transactions are authorized —transactions are recorded to
a) permit preparation of financial statements
b) maintain accountability for assets —access to assets is restricted
—assets are accounted for
These requirements are similar in nature to the definition of accounting con­trol
codified in SAS#1 (AICPA, 1973).
The advent of widespread use of electronic data processing led to changes in the nature of accounting controls prompting increased scrutiny and further for­malization.
Manual systems had allowed for informal controls of a pattern recognition nature by human information processors. Special emphasis was given to the examination of processing consistency and supervision. Automated systems partially changed the nature of control systems. The emphasis now is on system design and integrity as consistency is substantially assured.
These two major developments led to a series of procedural reactions by major CPA firms (e.g. Arthur Andersen & Co., 1978; Deloitte, Haskins & Sells, 1979; Peat, Marwick, Mitchell & Co., 1978), to statements of position and proposed rules by the AICPA and other standard setting bodies (e.g. AICPA, 1979; SEC, 1979), and to the renewed interest of the academic accounting profession in the theoretical issues surrounding internal accounting controls.
Among the expressions of interest by the academic profession is the research
*This project was funded by a grant from the Peat, Marwick, Mitchell Foundation through its Research Opportunities in Auditing program. The author wishes to thank the Foundation for its ad­ministrative
assistance in carrying out the project. The views expressed herein are those of the author and do not necessarily reflect the views of the Peat, Marwick, Mitchell Foundation. The assistance of Susan Weber Swoboda, Bachar Yazbeck, and Ian Daley in the preparation of this paper is gratefully acknowledged.
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