RUNNING HEAD: INTERNAL CONTROL IN ACCOUNTING
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INTRODUCTION
The management of an organization should ensure that internal controls are instituted in the operations of the organization.
According to (Policies on the Sarbanes-Oxley act, n.d) internal controls entail all the activities undertaken by management to ensure that the operation of the organization are not comprised in any way.
Internal control aims to eliminate any activities that threaten the assets of the organization such as fraud, ensure prescribed guidelines and procedures are followed and also ensure that information used by the organization for decision making contain the qualities of reliability and integrity.
LIMITATIONS OF INTERNAL CONTROL
Internal control systems contain loopholes which can easily be navigated by persons with intentions of compromising the security of assets and information of an organization. As put in (Policies on the Sarbanes-Oxley act, n.d) you can never get an internal control system that is one hundred percent effective.
For example in situation where the organization uses passwords to ensure only authorized personnel gain access to certain information authorized persons with intentions to of accessing such information will find a easy of beating the system.
Internal control systems especially operational controls are implemented by the employees of the organization. Human are prone to errors that if not detected early may compromise the integrity of the organization information or threaten the security of the company’s assets. This may due to factors such staff carelessness that may lead to errors like transposition, omission, addition that may cost the organization a lot of money if not detected early. For example where an employee in charge of writing checks or in charge of cash payments instead of typing one hundred thousand he or she erroneously adds a zero at the end and the payments are being made to many people such an error can be very costly for the organization to correct.
Another limitation to internal control system is they interfere with the effective operation of the organizations activities hence reducing productivity. They consume a lot of time and resources to implement for example audit trails may require the organizations to purchase software that duplicates the transactions in the normal system.
EXAMPLES OF INTERNAL CONTROL PROCEDURES AND HOW THEY CAN BE IMPLEMENTED
Operational controls
This involves activities undertaken during transactions to ensure that their no errors either deliberate, careless or lack of knowledge that compromise the integrity of those transactions in the organization.
Operational controls and procedures are implemented through ensuring that the transactions are authorized by the persons concerned, there is approval, execution of the transaction that is validated through receipts and all other supporting documents and finally recording of the transactions for example where an employee is travelling for official duty, the head of the department has to write a letter to the accounts department authorizing the travel the head of accounts approves the receipt of the letter which is then given the cash department that gives the person travelling the funds. After the employee resumes from official duty they have to provide documentation such airplane tickets to provide evidence that they travelled. The documents are the recorded and filed for future reference.
Audit Trails
Audit trails can be conducted by internal or external auditors. The auditors physically examine the transactions physically, simulate similar system as the organization and then use them to scrutinize the organizations transactions or use software to detect any errors in the system.
SYMPTOMS THAT AN ORGANATION LACKS INTERNAL CONTROLS
According to (Policies on the Sarbanes-Oxley act, n.d) if an organization lacked internal control it would be characterized by;
Poor decision making by management due to lack of reliable information that can aid the decision making process. This would be as result of lack of complete, up to date, reliable, information with integrity that can enable management make sound decisions.
The organization would also be coupled with cases of fraud where the organizations employees use the resources for personal gain or misappropriate the organizations resources for example cash.
Lack of internal controls is also characterized by lack of credit worthiness of activities undertaken by the employees due to lack of following guidelines and procedures during transactions. For example when inviting tenders from the members of the public there are certain procedures that should followed, if internal controls and checks lack in the organizations such procedures should not be followed making the creditworthiness of such transactions questionable.
Organizations that lack internal controls are characterized by low productivity because no one is monitoring the activities of the employees. The employees could take advantage of this to attend to personal matters or waste the organization time because no one can produce evidence of the activities by individual employees. They take advantage to hide behind group activities.
IMPACT OF MISSING JOURNAL ENTRY ON THE BALACE SHEET AND INCOME STATEMENT
Prepaid insurance of five hundred dollars was not recorded in the balance sheet and income statement for three months.
Insurance is item of expenses in the income statement. Expenses are deducted from the gross profit to obtain net profit before taxes and dividends. When an expense of $500 is omitted it will lead to over statement of the organizations profits for the three months.
A prepayment is an item of non current assets in the balance sheet. When an insurance repayment of $500 is not recorded in the organization balance sheet for three months it leads to understatement of the organizations net assets for three months.
References
Georgia Department of Audits and Accounts, (n.d.). As Retrieved on May 11th 2011 from site: https://www.audits.state.ga.us/ead/Internal_Control_Documentation.ppt
