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Handbook of Budgeting, 6th Edition by William R. Lalli

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CHAPTER FIVE

The Budget: An Integral Element of Internal Control

Jay H. Loevy, CPA, CFE

Edward Mendlowitz, CPA

WithumSmith+Brown

INTRODUCTION

No system can be effective without proper and adequate controls. It is abundantly evident from the body of technical literature (this book included) that the raison d’être of budgeting is its use as a control tool by management. The whole process—setting goals and objectives, establishing standards of performance, and analyzing and acting on results—is almost synonymous with the term “management control.” It is the way management is assured that “people in the organization do what they are supposed to do.”1

Yet the subject of this chapter deals with internal control rather than management control. The difference in terms lies with its use. “Internal control” appears to be used exclusively in the field of auditing. In its Statement on Auditing Standards 55, the American Institute of Certified Public Accountants (AICPA) states:

Although the internal control structure may include a wide variety of objectives and related policies and procedures, only some of these may be relevant to an audit of the entity’s financial statements. Generally, the policies and procedures that are relevant to an audit pertain to the entity’s ability to record, process, summarize, and report financial data consistent with the assertions embodied in the financial statements.2

Thus, staying with the more narrow definition of internal control, this chapter focuses on ...

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