StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Internal Control Strategies - Assignment Example

Cite this document
Summary
The paper "Internal Control Strategies" is a perfect example of an assignment on business. The aim of every business is to maximize its profit and that is accomplished through increasing operations. As companies aim at maximizing their profits, they encounter many challenges. Some of the challenges are the external factors whereas others are due to internal factors…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95.1% of users find it useful

Extract of sample "Internal Control Strategies"

ACCOUNTING By Course Professor’s Name Institution Date Accounting The aim of every business is to maximize its profit and that is accomplished through increasing operations. As companies aim at maximizing their profits, they encounter many challenges. Some of the challenges are the external factors whereas others are due to internal factors. The management is mostly unable to modify the external factors, but changes within the internal environment ensure continued growth, therefore, profit maximization. One favorite tool used by managers is the internal control. The paper will discuss the components of internal components that are applied by managers using a case study. Question 1: 5 components of Internal control Several factors in the business environment determine the way the company carries out its operations. Such factors may occur within the firm, known as internal factors whereas others may take place out of control of the organization known as external factors. Some of the internal factors include efficient innovation, accounting system and customer motivation whereas external factors may include competition, the laws and policies set by the government, and availability of raw materials (Arens, 2002). Managers and executives are responsible for ensuring that the business achieves its set goals and objectives (Arens, 2002). They, therefore, adopt various internal control mechanisms that help in keeping the business on track with an aim of achieving these goals. The business environment determines the success of an organisation, therefore, the need to implement measures to manipulate it. Various issues arise in the process, and internal control is used to tackling them. The objectives of internal control include aiding the business in carrying out operations that are ethical in an organised manner while ensuring that they are effective and efficient enough to guide the company towards the attainment of its goals (Harrer, 2008). It also helps in ensuring accountability of the use of resources, both financial and non-financial through the implementation accounting principles. The internal control ensures that all the business operations including the accounting system comply with the stated laws and regulations. Another objective is to safeguards assets of business against misuse, damage or even their loss by ensuring their effective use and accountability. The application of the right Internal control in business helps in assessing the risk a company is exposed to in the business environment. By ensuring the right accounting measures are applied, internal control is important to business as it increases the reliability of its financial statements. These statements are essential in not only in reducing the possibility of fraud and ensuring efficient use of resources but also as a tool for funding (Needles et al. 2010). Another advantage of the internal control is their role in safeguarding business resources against theft, misuse and damage. It ensures that the assets acquired by a business are intact and are used efficiently. An effective internal control involves the integrations of several components. The components are interrelated and include control environment, risk assessment, control activities, monitoring and information and communication systems (Harrer, 2008). The control environment is the primary element assisting the other components to have an effective internal control. The control environment is critical in ensuring the business implements an efficient internal control. Several sub-elements are involved in ensuring that the right environment is implemented. The first sub-element of control environment is ensuring the management that includes chief executive, the managers and the board of directors support the internal control creating a tone for the other workers in business to follow (Arens, 2002). The support of the top management can be shown through the actions, policies, and procedures that they apply to internal control. By top management creating and supporting internal control and communicating to the other workers its importance is essential in ensuring the right attitude. Another critical area for the control environment is the establishment of appropriate lines of reporting so as to ensure accountability to one's responsibility. One way to establish such is the implementation of an internal audit system that is independent of the top management (Arens, 2002). The human resource department that is responsible for hiring, promotion and assigning of activity is an essential element of the control environment. It is responsible for ensuring ethical and transparency in daily practices in the workplace. The failure by top management to create a supporting environment towards internal control, other players in the organisation responds, in the same manner, failing to show concern for the internal control (Harrer, 2008). In the case study given where Jack embezzled three million dollars in a period of ten years, the management failed to show concern and support to the internal control. They did not implement a system of reporting such as an internal audit system as they felt that the profits being generated by the business reflected effective operations. The lack of the support resulted in such large discrepancies as the one practiced by Jack and his wife who received goods and approved the invoices for the same. The human resource also is shown weakness as it gave Jack and his wife positions within the company that could permit the execution of fraud with an aim to serve personal interests. The other component of internal control is the risk assessment. The business environment is composed of internal and external factors that pose the risk to the attainment of business aims and objectives. Risk assessment as a component of internal control involves identification of risk, evaluating it, carrying out a risk evaluation and eventually developing the right response (Weygandt, 2009). One weakness posed by risk assessment as a component of internal control is that it does not guarantee the attainment of an organisation's goals and objectives fully but instead only offers reasonable assurance. In the case study, the organisation did not carry out effective risk identification. An effective assessment would have identified the risk of fraud by its workers, therefore, lead to the implementation of the right response. The appropriate response in the case study would have been the treatment of risk through the implementation of effective internal control activities that would ensure efficient financial resources management (Needles et al. 2010). Financial risk is quite easy to identify as it involves a diagnosis of the financial figures (Needles et al. 2010). The control activities adopted by management to reduce the risks so as to help the organisation achieve its stated objectives are the other component of internal control. They involve policies and procedure adopted by the management and should relate directly with the attainment of the objectives. The adherence to the right authorization and approval procedure minimize the possibility of misuse and misappropriation of resources. The duties should also be segregated to avoid a single individual from controlling all critical stages of a transaction. Some of these key responsibilities include the authorization, processing, recording, and reviewing (Needles et al. 2010). Another sub-element of effective control activities is giving access to resources and records, to only authorized personnel who should then be held accountable in case of misappropriation. The verification process is also an important element of internal control where the number of goods delivered from the supplier should be verified with the goods ordered. The invoiced goods should also be compared with the number of goods received, and the verification process should be done by independent persons (Needles et al. 2010). After verification is done, reconciliations of the recorded goods of should be done by another independent body using the relevant documents such as bank statements. The operating performance, operations, processes and activities employed by the company should also be reviewed regularly to ensure compliance with current rules and regulations and also the objectives of the organisation (Weygandt, 2009). Supervision to help in the achievement of internal control aims and objectives is essential and can be done through reviewing and approving. The failure to implement either the detective or preventive activities increases the risk of financial risk (Harrer, 2008). The business under the study failed to implement authorization and approval procedures and also segregate the essential duties. The failure provided a platform for Mr. Jack and his wife to engage in fraudulent activities since the organisation not only has poor inventory control but also did not have authorization and approval procedures. He was the purchasing manager and had been assigned the duties of receiving goods as well as approving their invoices. The wife was also positioned in the accounts payable department enabling for the practice of fraudulent activities. The company failed to verify the amount of goods received as compared to the goods invoiced. It is indicated that an invoice for three shipments would be received by the company when a delivery of only two shipments had been received. The failure led to the each company's department incurring a variance of 50,000 dollars monthly. Information and communication are the other components of internal control. Information involves the recording and classification of all activities such as transactions and other events in a clear way that can be easily understood (Weygandt, 2009). It also involves recording and classification of the information on time to permit the communication of the information at the right time. Classification involves organising and categorising making the information available to the customers. The information to be communicated may be financial, non-financial, operational or even compliance. Once the reports are received, the targeted parties can evaluate it by effectiveness and efficiency to make informed decisions. In the case study, the company failed to keep current and timely information as it took many years for management to realise the scam been committed by Jack and the supplier. The recording of the financial information and its classification was poor since it could have been noted that the payments for the shipment are inconsistent with the earnings recovered. The last component of internal control is monitoring. The use of routine monitoring activities that could be done help separately to determine the quality of internal control system applied over time (Needles et al. 2010). An ongoing monitoring is done to assess the recurring activities that a business carries out whereas separate evaluations are done after a given span of time. The choice of the type of monitoring adopted depends mainly on the kind of risk being assessed and the effectiveness of each method (Needles et al. 2010). A combination of both methods can also be carried out demanding on type of risks. The company outlined in the case study lacked effective monitoring systems. Ongoing monitoring would have detected only two shipments were being received whereas the payment for three shipments was being made. Separate evaluation would also have pointed at sudden improvement in Jack's lifestyle where he bought a lakefront mansion, boat, fancy cars and even made frequent trips abroad. The salary of a purchasing manager would not allow one to adopt that kind of money unless there were fraudulent activities within the position. Question 2: Bank reconciliation and petty cash activities. One method used as an internal control is the bank reconciliation and petty cash management. Bank reconciliation is the reporting that is done as a comparison between the amounts stated in the bank statement provided at the end of a financial period with the amount of the business accounting records (Needles et al. 2010). It is done to as a measure of identifying fraud in business activities. When such details differ, it does not automatically transfer to fraudulent activities as certain financial activities can be reflected in the bank statement whereas they are not indicated in the business accounting records and vice versa. The difference is caused by the timing and what guide inclusions of specific activities within a given financial period. Such include uncleared checks, bounced and deposited checks but returned (Needles et al. 2010). It is also important to prepare bank reconciliation as the help in detecting unintended errors in the accounting records by a business or those made by the bank over a particular accounting period. Petty cash management, on the other hand, involve keeping records of petty cash used in daily business operations (Needles et al. 2010). Petty cash is the cash kept by a company to help in small purchases that vary depending on the business under consideration. Petty cash reconciliation involves the verification of the activities that consumed the petty funds. Businesses use bank reconciliation provides internal control by acting as a tool for monitoring. It can be used to carry out an ongoing monitoring through monthly reconciliation or as a separate evaluation by annual bank reconciliation (Needles et al. 2010). Petty cash reconciliation acts is an internal control by helping detect irregularities in the misuse of funds. There have been cases where workers present petty cash used in activities for refund when in reality the activities indicated did not happen. Question 3: Two internal control activities Apart from bank and petty cash activities reconciliations, there exist many methods of ensuring internal control. The method chosen is normally dependent on the objective being targeted by the internal control. One aim of internal control by a business is to safeguard against misuse, loss or damage of the assets belonging to the company (Weygandt, 2009). The assets may be either physical or non-physical each demanding different form of internal control. Some of the physical assets include tangible properties such as buildings, equipment, stock and even cash. Non-physical goods, on the other hand, include intangible assets such as intellectual property rights and debtors (Weygandt, 2009). Another objective that determines the choice of the internal control is verifying the accuracy and reliability of financial information (Weygandt, 2009). By ensuring accuracy and reliability of accounting records, the chances of financial risk are minimised. The rules and regulations governing the operation of a company in the business environment keep changing (Weygandt, 2009). As business aims at ensuring compliance with the changing requirement, they employ varying internal control mechanisms. In the case study presented that involved the audit of Foundation for Youth Bible Studies by Able and company auditors, the company applies several internal control activities (Arens, 2002). Two of them include carrying out a regular audit by an external body whereas the other included is the splitting of key roles. The first internal control discussed is the implementation of a routine audit by the company. It is stated in the case study that the audit that detected fraud was the tenth consecutive audit activity. As company targets at safeguarding assets from damage, loss or misuse and also ensure the reliability and accuracy of financial information, it can carry regular audit for early detection of inconsistency. The body that is audit the company can be internal or external but needs to be independent of top management to reduce chances of manipulation. The case study identifies that Able and company auditing company, an external and independent organisation was in charge of auditing Foundation for Youth Bible Studies (Arens, 2002). The other type of internal control that was applied by the company was splitting of key roles. The handling of cash, recording on the general ledger and on the head office cash receipt was done by three independent persons (Arens, 2002). Although there was failure to record cash received at the source, the splitting of key roles is important in gaining control of recording of financial information ensuring its accuracy and reliability. References ARENS, A. A. (2002). Auditing in Australia: an integrated approach. Frenchs Forest, N.S.W., Pearson Education Australia. HARRER, J. (2008). Internal control strategies: a mid to small business guide. Hoboken, N.J., Wiley. NEEDLES, B. E., POWERS, M., & CROSSON, S. V. (2010). Financial and managerial accounting. Mason, OH, South-Western Cengage Learning. WEYGANDT, J. J. (2009). Financial accounting. Hoboken, N.J., Wiley. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Internal Control Strategies Assignment Example | Topics and Well Written Essays - 2500 words, n.d.)
Internal Control Strategies Assignment Example | Topics and Well Written Essays - 2500 words. https://studentshare.org/business/2074073-accounting-essay
(Internal Control Strategies Assignment Example | Topics and Well Written Essays - 2500 Words)
Internal Control Strategies Assignment Example | Topics and Well Written Essays - 2500 Words. https://studentshare.org/business/2074073-accounting-essay.
“Internal Control Strategies Assignment Example | Topics and Well Written Essays - 2500 Words”. https://studentshare.org/business/2074073-accounting-essay.
  • Cited: 0 times

CHECK THESE SAMPLES OF Internal Control Strategies

Balanced Scorecard Concerning the Company's Financial Strategy

ccording to Kaplan and Norton (2000), a balanced scorecard improves the financial capability of the company and this signifies the beginning point of internal control.... … IntroductionA balanced scorecard refers to a strategic planning and management system which is used comprehensively to align business undertakings to the visions and strategies laid.... It is mainly used by business entities, the government and non IntroductionA balanced scorecard refers to a strategic planning and management system which is used comprehensively to align business undertakings to the visions and strategies laid....
7 Pages (1750 words) Essay

E-Marketing Strategic Planning Based on the SWOT and Situation Analysis of Biome

Much about the internal and external environment of this company will be explored in the subsequent section.... ituation analysisThis section will explore the internal as well as the external environment of Biome.... … The paper “E-Marketing Strategic Planning Based on the SWOT and Situation Analysis of Biome" is an impressive version of the case study on marketing....
19 Pages (4750 words) Case Study

Google Company Strategic Marketing Plan

PEST N external analysis offers a critical evaluation of the macroeconomic factors implicating and likely to implicate an organisation marketing strategies into the future.... Situational Analysis A situational analysis on Google Inc and the search engine product, in particular, is developed through both an internal and external analysis review using the SWOT and PEST analysis tools respectively.... SWOT Strength, weakness, opportunities and Threats analysis is one of the most strategic internal evaluation tools used in evaluating the structures and internal environment and process in organizations....
22 Pages (5500 words) Case Study

Realistic Long-term And Short-term Process and Outcome Goals

Staffing goals (process and outcome) of Chern's sales associate incorporate the strategies of the business (Phillips & Gully 2009).... Staffing goals (process and outcome) of Chern's sales associate incorporate the strategies of the business (Phillips & Gully 2009).... However, during the whole hiring process, the managers are vigilant and observant in bearing in mind the strategies applied by the company....
8 Pages (2000 words) Essay

Risk Management: Principles and Guidelines for Implementation - Case of Riverview Park Hotel

Stakeholders' analysis The hotel's stakeholders are either internal stakeholders or external stakeholders.... … The paper "Risk Management: Principles and Guidelines for Implementation - Case of Riverview Park Hotel" is an exceptional example of a business plan on management....
9 Pages (2250 words)

External and Internal Business Environments

The economy has the ability to influence marketing strategies, investment plans, and the markets that the organization should explore in order to maximize its profits (Kaarbøe, 2013).... External and Internal Business Environments The external environment of an organization is composed of those factors that highly influence the ability and effectiveness of the organization, though from outside and the organization does not exercise direct control over them (Aguinis et....
8 Pages (2000 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us