What Are Control Objectives in Business and Auditing?

A control objective is a specific goal a company establishes to guide its actions. These objectives are the “why” behind the internal controls businesses implement, ensuring they are targeted at achieving desired outcomes. The primary aims are to promote efficient operations, produce reliable financial reports, and ensure the business adheres to all relevant laws and regulations. By setting these targets, a company creates a framework to manage risk and direct its resources effectively.

The Three Main Categories of Control Objectives

Control objectives are broadly sorted into three categories that address the full scope of a business’s activities. The first category, operational objectives, relates to the efficiency and effectiveness of the company’s core business functions. This includes goals related to performance, profitability, and the protection of company assets from theft or misuse. An example would be an objective to ensure that all customer orders are fulfilled and shipped within a 24-hour window to enhance customer satisfaction.

Reporting objectives form the second category and concentrate on the integrity of a company’s reporting practices. This extends beyond external financial statements to include internal management reports and non-financial publications. The aim is to ensure that all disseminated information is reliable, timely, and accurate. For instance, a company might set an objective to produce an accurate accounts receivable report by the fifth business day of each month to manage its cash flow.

The final category is compliance objectives, which are centered on adherence to the laws and regulations that govern a company’s operations. These objectives ensure the organization avoids legal penalties and maintains its good standing. This could involve meeting federal tax filing deadlines, such as filing Form 941 on time each quarter. It also includes complying with industry-specific rules, like data privacy standards for handling sensitive customer information.

How to Develop Control Objectives

The creation of control objectives is a structured process tied to a company’s risk assessment activities. It begins with management identifying the business processes that are fundamental to its operations, such as sales, procurement, or payroll.

Once the primary business processes are identified, the next step is to analyze the risks inherent in each one. This involves asking what could potentially go wrong at any stage of the process. In the context of a company’s payroll system, a risk is the possibility of issuing payments to individuals who are no longer employed by the company.

After a specific risk has been identified, a control objective is formulated to directly mitigate that threat. For the risk of paying a former employee, the corresponding control objective would be: “To ensure that payroll disbursements are made only to current and valid employees.” This objective then guides the implementation of specific internal controls, such as a procedure requiring human resources to promptly communicate all terminations to the payroll department.

Examples of Control Objectives in Business Operations

In the cash receipts process, several objectives are necessary to protect one of the company’s most liquid assets. One objective is to ensure that all cash, checks, and electronic payments received from customers are recorded completely and accurately in the company’s accounting system. This prevents the loss of revenue and misstatement of financial records.

Another objective for cash receipts is to ensure that all funds are deposited into the company’s bank account in a timely manner. Delays in deposits can affect cash flow and increase the risk of misplacement or theft. A related objective is to restrict access to cash and payment processing systems to only authorized personnel. This is often achieved through controls like segregation of duties, where the employee who records cash receipts is different from the one who makes the bank deposit.

In the purchasing and accounts payable process, control objectives focus on preventing unauthorized or unnecessary expenditures. An objective is to ensure that goods and services are purchased only after receiving proper authorization from management. This prevents employees from making unapproved purchases that do not serve a legitimate business purpose and is often managed through a purchase order system.

A further objective in this area is to ensure the company only pays for goods and services that it has actually received and that the payment is for the correct amount. This involves matching the vendor’s invoice to the purchase order and a receiving report, a process known as a three-way match, before payment is issued. An additional objective is to ensure all vendor invoices are recorded accurately and in the correct accounting period, which is important for producing reliable financial statements.

The Role of Control Objectives in an Audit

From an external auditor’s perspective, control objectives serve as the foundation for evaluating a company’s internal control environment. Auditors do not create these objectives, as that is the responsibility of the company’s management. Instead, the auditor’s role is to assess the objectives management has established to determine the potential risks of material misstatement in the financial statements.

An auditor uses a company’s stated control objectives as a starting point for planning the audit. If a company has clearly defined objectives, it provides the auditor with a roadmap of the risks the company has identified. For instance, if a company has an objective related to the accuracy of revenue recognition, the auditor can focus on testing the specific controls designed to meet that objective.

The clarity of a company’s control objectives directly impacts the efficiency of an audit. When objectives are well-defined, auditors can more easily identify the relevant controls to test, which allows them to tailor their procedures to be more focused. A company with strong control objectives demonstrates a solid control environment, giving the auditor more confidence in its financial reporting.