Internal Control System
Today’s paper is going to discuss the limitations of the internal control system with some examples given and their procedures. This essay will also identify some symptoms that “lack” of the internal control system; and conclude with an explanation of how a missing journal entry on financial statements could impact a corporation.
Internal Control System
1) Identify the limitations of the internal control system—provide at least three limitations.
An internal control system is the responsibility of every firm to design a system that is adaptable to them. No matter how well one firm plans and applies their internal control system; there can be no certainty that their objectives will adhere. The company’s objectives are not reliant only on them; limitations are subject to many factors. Some of those factors are; reservations in today’s world; judgment of people or just errors that happen due to simple human error. When carrying out controls it is vital to keep in mind not to develop an unnecessary and costly event. Remember the cost and benefit relationship; it may mean tolerating a risk.
- Judgment—The success of internal controls are going to be restricted because of the choices humans make doing business under pressures with the information they have at hand.
- Breakdowns—Nothing is invincible and even well-developed internal controls are capable of breaking down. From higher-ups to employees at times instructions could easily be misunderstood and mistakes will happen. New technology and sometimes the confusion of computerized information systems will result in errors.
- Management Override—Higher-ups can and will at times (if capable) override on policies and procedures to gain advantage. Do not mix this up with management intervening to depart agreed policies and formalities for legal reasons.
- Collusion—Internal control systems can be avoided by company employee’s collusion. Employees working together can change the financial information or any other administration information to the point that it is unidentifiable to the control systems.
2) Provide at least two examples of internal control procedures and explain how these procedures can be implemented.
Cash Receipts—You must understand the who, what, where and when; no system is fool proof but a near perfect designed set of control guides can give a sense that a large amount of theft with cash receipts and ledger mistakes will be cut down or detected. Monetary value, above all government revenue, has the most capability for a theft if internal controls are not in place and functioning properly.
1. Consolidated monetary collections inside a sector or for the local government as an entity.
Explanation for control— less localities and less workers gathering money will cut the chance for a theft to happen plus give a better accountability for cash collections. To be consistent with the procedures of the law all cash collections should be held in one place, which is usually in the chief financial treasurer’s office.
2. Assigning separate drawers to each worker who is in command for compilation of money.
Explanation for control—allocate each worker his or her own drawer gives individual accountability for the cash he or she collected. If the worker is a thief; having a separate drawer will make it easier to trace the responsible party to the theft.
3. Limiting authorized invoices as quickly as we get them.
Explanation for control—at once restricting the discussion of invoices will ensure that invoices except will only be credited to a district administration’s depository account.
4. Teach accumulators that no payroll or personal checks are allowed to be cashed for money out of their drawer.
Explanation for control—procedures are as follows-“workers are not allowed to borrow monetary value and cover the deduction with a person check.” This lessens any risk of non-collection on a defective workers check.
5. Teach accumulators not to take invoices for sums over the total due.
Explanation for control—district administrations are not reservoir giving money back as a service to patrons ought not to be permitted.
Cash Disbursements—district governments have been known to create a mix of monetary spending; usually by invoice (check) but they also can do a wire transfer for a note or bond along with express payment for take-home pay when official; in money, for small fiscal payments. Fraud happens more frequently when there is a cash disbursement cycle then in your budgetary payment’s cycle then in your money note cycles. Progress in technology with cyber funding has made the money payment cycle even more vulnerable to predators outside the district government.
Check Preparation Procedures:
a) Pick a worker who is not responsible for the check preparation and have him/her order the invoices; take an inventory of the invoices and if for any reason, there is a skipping of numbering or missing of a number of the sequence; identify the reason; once the sequence if fixed issue the invoices as pre-numbered.
Explanation for control—requesting and recording the pre-numbered checks by an assigned worker will cut the risk of blank checks going undetected or being misused. The pre-numbering helps trail over the disbursements for audit time.
b) You want to keep the check stock and blank checks protected every moment.
Explanation for control—security for the bare invoices and the supply in a controlled and secured environment will avert theft and the abuse of them.
c) When writing out the check be exact “recipient” or “guardian” never money or trivial cash.
Explanation for control—when making the invoices due to a certain recipient it cuts the danger of just anyone cashing the check that it was not made out to; fraud.
d) When using financial software in printing invoices; confine the use of handwritten invoices.
Explanation for control—usually used gears are figured into high-tech fiscal units to identify and block expenditures to unapproved beneficiaries or the release of any shady sums. IT functions gears can be avoided by publishing distributed invoices; although the procedure needs to be limited and controlled.
3) Identify symptoms of a lack of internal control.
- Attributes: A successful technique that internal control’s safeguards procedures; honor of fiscal recordings and administration reports. Company conformity with legality and rules; to minimize the chance of unforeseen deficits and/or destruction to a firm’s status. The devotion to the internal procedures and policies; the proficient strategies and extended-period success. Various administration procedures and policies show evidence that the company is lacking in these qualities.
- Reviews of Performance: Non-existence of detailed recording events that are used to keep the trail of real occurrence up next to past occurrences; budgets and forecasts. Independent verification of event’s calculations and the reconciliation of remainders should be included.
- Touchable Control: Solid control over revenue is a vital part of internal control. Financial recordings and/or other sensitive materials laying in opened areas; alternatively, not securing computer data bases or applications from an unauthorized use along with property not being locked in a secure facility shows lack of physical control.
- Separation or Isolation of duties: A successful system will contain the division of work among the staff. An example would be someone who has the job of okaying a transaction; they cannot have the job of recording it. If the staff does not stay to strict procedures and routines; it leaves the company open for a chance to continue with an error or wrong doing.
- Monitoring: To ensure that the internal control system is relevant and effective in detecting any new threat; the system must be monitored at all times. The inner controls need to be evaluated periodically through a separate risk management or independent audit; if not it is a sign of in-adequacy in inside controls. Findings of the evaluations that are done from time to time needs to be also reported to all appropriate individuals.
- Integration: When integrated with the structure of administrations process; internal control can be successful. Controls that are applied as an aid is not sufficient to avoid possible defiance of laws and give an ample threat safeguard to ensure the stability of the company and its procedures.
4) Explain the impact of the missing journal entry on the financial statements of the company.
v Monetary value that is exchanges but the situation is not gratified yet. Recorded as a revenue or expense.
v Expenses prepaid such as; a company’s rent insurance or advertising, anything funded ahead of time; revenue will be displayed on impending income statements.
v Revenue that is unearned such as binding payments or up keeps leases that is also prepaid ahead of time; revenue will appear on upcoming income statements.
These kinds of transactions are noted before the preparation of financial statements these financial statements will show all assets that have been well-earned and costs.
The impact of the missing journal entry of $500 for the first three months for a year policy would look like this:
Deferred expense the whole year policy will equal $6,000 @ $500/month on a twelve month policy.
Money is spent each month to allocate the expenses each month; you need to use an adjusting journal entry; first entry should appear as this:
|January 5||Prepaid Ins.||6,000|
Journal entry in making record of January’s expense of Insurance at the end of the month.
Record a month (one) insurance policy.
The insurance decreases monthly as company expenses are moved from the balance sheet to the income statement.
If the first three months of $500 was not recorded on the journal entry then it would still show as the company…1) owing $1500 still to the insurance company and 2) most importantly this would send all your financial statements with an unequal balance; starting from your entries; balance sheet all the way down. Well I do not think you would get past a trial balance to be honest with you. For some reason a miracle happens and this mistake doe’s slide by eventually it will catch up and could put the company in financial ruins.
AICPA. (2012). Considering Internal Controls [American Institue of CPA’s]. In AICPA. Retrieved May 10, 2012, from AICPA website: http://www.aicpa.org/interestareas/forensicandvaluation/resources/fraudpreventiondetectionresponse/pages/considering%20internal%20controls.aspx
DiNapoli, T. (2010, October). ComptrollerThe Practice of Internal Controls [LOCAL GOVERNMENT MANAGEMENT GUIDE]. In Office of the New York State Comptroller. Retrieved May 11, 2012, from Local Government website: http://www.osc.state.ny.us/localgov/pubs/lgmg/practiceinternalcontrols.pdf
Goodwin, A. (2012). Chapters 5 and 7. In Financial Accounting. Cengage. doi:9781111219543
Middle City. (2010). Accounting Lessons [Accruals and Deferrals]. In Middle City. Retrieved May 11, 2012, from Middle City website: http://www.middlecity.com/ch04.shtml