Internal Controls
An internal control is a method a company uses to ensure the integrity in the business and keeps it running in an effective and efficient way. Internal controls safeguard the assets of the company and prevent fraud from happening. There are administrative controls and financial controls, administrative control is dealing with documents and preventing fraud and financial control is safeguarding assets etc.
The purpose of Internal controls
Internal controls are put to use because this can help a company run effectively and efficiently, internal controls can also stabilize and strengthen your predicted outcomes to make them more accurate, it also safeguards a company’s assets and can detect fraud, errors and theft, for example installing cameras and alarms in the storage area to prevent people from stealing goods, or checking and reviewing the document and files of a company to ensure that there is no fraud and errors. With internal controls in place a company can run smoothly, and doesn’t cause the owner to lose valuables such as trading stock and equipment which can impact the company’s current ratio also known as the liquidity ratio since it affects their inventory.
The role of an internal auditor
Designing the internal control
The internal auditor is responsible to design the controls and develop long range audit plans, they also tests the control systems of a company to find problems in the system; they then give the company recommendations of how they could improve their system and how to make it more efficient.
Implementing the internal controls
The internal auditor is responsible to maintain the controls. While implementing the internal controls the internal auditor m...
... middle of paper ...
...on that is in charge of the business, not anyone random.
• Each employee must be in charge of specific debtors, this could reduce the possibility of fraud, theft or errors.
Documents and recording
• Every debtor should have their own books and be recorded separately
• All documents must be locked up in a safe
• All accounts should be put in a safe that indicates the time left for them to pay, for example the first level of the safe means that all the debtors have 3 months to pay off their account and the second level means that they have 2 months to pay off etc. and at the end of every month you move all the books one level up and the debtors that didn’t pay should be moved to another safe or dealt with immediately.
• If a debtor pays late it should be recorded and interest should be charged.
• All bad debtors should be considered black listed.
Implementing strategies to create an effective internal control environment is needed to prevent and detect controls of fraud (Murphy, 2015). Control is needed to combat fraud, enforcing employees and volunteers to do the right thing. Management must have control of the organizations operations to tackle risks when they arise (Arshad et al, 2015). According to Arshad et al (2015):
Even though internal controls do not always work, every entity that has workers should have internal controls. Internal controls protect entities from dishonest workers. Internal controls are a series of checks and balances. The Sarbanes-Oxley Act of 2002 was needed to gain control of accounting improprieties. Dishonest accounting has cost company employees millions of dollars in retirement funds. It has also cost investors millions of dollars.
Internal locus of control is how you as a person dictates how their work or personal life is going to go. Meaning the results of something is based on ones behaviors and actions. For example, getting the new job promotion and you knowing that you got the job for your hard work and not because you think, it is out of pure luck.
As good risk management can not only help to keep company’s established value, they can also assist in capitalizing and identifying to create value. According to principle 7 recommend to have an internal audit faction, the role of internal auditor is to help the board monitor and manage risk directly.(ASX 2014).
What is internal control? According to University of Phoenix, Axia College Internal Control and Cash (2009), internal control is all of the related methods and measures adopted within an organization to safeguard its assets and enhance the accuracy and reliability of its accounting records. The primary reasons for internal control are help companies protect their investments and merchandise against theft from everyone, including employees and to make sure that the accounting is done correctly and truthfully.
The COSO Internal Control—Integrated Framework provides a blueprint for implementing an internal control system to assist in ensuring the reliability of financial statements and compliance with Sarbanes-Oxley legislation. The purpose of internal control is to provide reasonable assurance in achieving internal control objectives: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with laws and regulations
Internal controls are a big factor in a company’s growth and value. Proper accounting practices are a big part of this process. Following the scandal caused by the unethical practices used by companies such as Enron, Tyco, Global Crossing and Worldcom, the Sarbanes-Oxley Act of 2002 was enacted. This act held companies accountable for their actions. Companies could either face fines, imprisonment or both if the act was not followed. Also, if there are deficiencies in a company’s internal control, stock prices can plummet. There are many physical, mechanical and electronic controls involved in internal controls. Some of these are good controls while others, even though helpful, are not as effective as others.
The purpose of the internal audit is to protect Costco 's assets through evaluating the acceptability and efficiency of internal controls; recognizing areas of possible risk, revenue improvement and/or cost reductions; and making sure transactions are authorized, completed, and logged as proposed. The internal auditors are accountable for guiding audits of all Costco’s local and global activities, its affiliates, and other entities Costco conducts business with as deemed necessary by management.
Since the implementation of SOX, companies are required to establish effective and efficient internal controls in order to be in compliance with the SEC requirements (Jahmani & Dowling, 2015, p. 129). According to COSO internal control is defined as “a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objectives: 1. Reliability of financial reporting, 2. Compliance with laws and other regulations, 3. Efficiency and effectiveness of business operations, and 4. Protection of property” (Kanagaretnam et al., 2014, p. 30 & Kapic, 2013, p. 63). Additionally, Kapic notes internal controls contain policy and procedures that assist the company and management with smooth operations of all daily business
Internal audit is done by a selected team within the organisation. The trained staff not directly responsible for what is being audited are recruited to conduct the internal audit. The various records that are reviewed in an internal audit are procedures and policies, training records, observation of process etc.
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
It is important to develop and maintain internal controls inside nonprofit organizations because they assist in maintaining ethical standards. According to the National Council of Nonprofits (NCN) internal controls are financial management practices which are systematically used to prevent misuse and misappropriation of assets
Internal management defined in accounting and auditing is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization. It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organization's resources, both physical and intangible.
Audit is a process to evaluate and review the accounts and financial statement objectively. We can divide it into internal auditors and external auditors. Internal auditors have a inner knowledge of business process. Auditor has access to the much confidential information and all levels of management. But they may lose their judgement and they are not acceptable by the shareholder. “The overall objective of the external auditors is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in acco...
Overall, the company is having ineffective controls regarding different departments and in the whole organization. An effective internal audit department should be established within the organization which should test the effectiveness of these controls on regular basis and make it sure that all controls are working effectively and efficiently with the different departments of the organization. Also the Internal auditor should implement the most effective processes and measures to prevent and detect the fraud, corruption and non compliance with the laws and regulations in the organization. Establishment of internal audit committee would be helpful in this regard which comprises of executive and non executive directors.