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What Are Internal Controls in Auditing? Types and Best Practices

In the oil and gas industry, precision and compliance aren’t just good practice; they’re critical for protecting assets, meeting regulatory requirements, and maintaining investor confidence. Internal controls form the backbone of these efforts. They’re the policies, procedures, and systems that help companies ensure their operations run smoothly, their financial records are accurate, and their assets are safeguarded.

At Navigator Petroleum, we’ve seen firsthand how robust internal controls can make or break project outcomes. In this article, we’ll explore what internal controls are in auditing, the different types, and best practices for oil and gas companies looking to strengthen their governance.

What Are Internal Controls in Auditing?

Internal controls are the checks and balances that companies put in place to prevent errors, detect irregularities, and correct problems when they arise. During an audit, these controls are evaluated to determine how reliable a company’s financial and operational reporting really is.

For oil and gas companies, internal controls do more than support accurate bookkeeping, they help ensure compliance with local, national, and international regulations, reduce fraud risk, and build trust with partners and stakeholders.

Why Internal Controls Matter in Oil and Gas

Oil and gas projects often involve complex contracts, large capital investments, and multiple stakeholders. Without strong internal controls, it’s easy for small errors to snowball into costly mistakes or compliance breaches.
Navigator Petroleum works with clients to identify and address these risks before they become problems. Whether it’s verifying production volumes, reconciling joint venture accounts, or ensuring procurement transparency, effective internal controls keep projects on track and reputations intact.

Internal Controls vs. Internal Audits. What’s the Difference?

While the terms are often used interchangeably, internal controls and internal audits are not the same thing. Internal controls are the systems, procedures, and policies designed to safeguard assets, ensure accurate reporting, and maintain compliance. Internal audits, on the other hand, are independent evaluations of those controls to confirm they are effective and being followed. In other words, internal controls are the mechanisms for managing risk, while internal audits are the process of reviewing and improving those mechanisms. Navigator Petroleum works with clients to strengthen both, ensuring operations are protected from every angle.

Types of Internal Controls

Preventive Internal Controls:

These are proactive measures designed to stop errors or fraud before they happen.

Examples:

  • Restricting system access for procurement and finance functions.
  • Pre-approving capital expenditure requests.
  • Segregating duties so no single employee controls all stages of a transaction.

Detective Internal Controls:

These identify issues after they’ve occurred, so they can be addressed quickly.

Examples:

  • Reconciling production and sales data on a regular schedule.
  • Conducting periodic inventory counts for equipment and materials.
  • Reviewing audit trails in ERP and financial systems.

Corrective Internal Controls:

These come into play once a problem is found.

Examples:

  • Correcting errors in royalty or tax reporting.
  • Updating processes after a control failure.

 

Real-World Internal Control Examples in Oil and Gas

  • Preventive: A company implemented strict vendor onboarding procedures to prevent overbilling in service contracts.
  • Detective: Monthly reconciliation of fuel deliveries revealed discrepancies, prompting a supplier review.
  • Corrective: After missing a regulatory reporting deadline, the compliance team revised internal approval timelines to avoid future delays.

Best Practices for Implementing Internal Controls

  1. Start with a Risk Assessment: Identify the operational and financial areas most vulnerable to error or fraud.
  2. Segregate Duties: Split responsibilities so no single person has complete control over a process.
  3. Monitor Regularly: Schedule audits, reconciliations, and performance reviews.
  4. Leverage Technology: Use ERP systems, automated alerts, and reporting dashboards.
  5. Train Staff: Make sure employees understand why controls are important and how to follow them.
  6. Document Everything: Keep clear records for accountability and audit readiness.

How Navigator Petroleum Can Help

At Navigator Petroleum, we understand the challenges oil and gas companies face when it comes to audits, compliance requirements, and operational risks. Our team specializes in evaluating, designing, and improving internal control systems, delivering industry-specific solutions that align with your operational goals and regulatory obligations. Whether you require a one-time internal control audit or ongoing support, our consultants provide the expertise and insight needed to reduce risk, improve efficiency, and strengthen governance across your operations.
Strong internal controls aren’t optional in today’s oil and gas environment, they’re essential. They protect your assets, ensure compliance, and keep projects running efficiently. By implementing preventive, detective, and corrective measures tailored to your operations, you set your business up for long-term success.
If you’d like expert guidance on evaluating and improving your internal control systems, contact Navigator Petroleum today. Our team has the industry insight and practical experience to help your company strengthen its governance and achieve its goals.

About the Author

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Aaron David

Aaron David has more than 30 years of experience in the oil and gas industry. Prior to launching a career dedicated to oil and gas auditing Aaron worked in corporate income tax and financial accounting. He was chief accountant for a U.S. subsidiary of a Canadian oil and gas company as well as treasurer of a public oil and gas company in Canada.

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