The companies that have been chosen for the purpose of analysis are the Woolsworth Group (ASX code – WOW), Wesfarmers Limited (ASX code – WEC) and the Commonwealth Bank of Australia (ASX code – CBA).
The individual monthly returns, average monthly return, variance and standard deviation of the monthly returns for the chosen companies are as follows:
The stock, which has the highest return, is the stock of the Commonwealth Bank of Australia as can be derived from the above table. The return obtained from the stock of the entity is the highest that is 1.22%.
The stock, which has the highest total risk, is also the stock of Commonwealth Bank of Australia as the risk unit amounts to 5.22% and the stock having the highest return per unit of total risk, also belongs to the Commonwealth Bank of Australia as it amounts to 23.33%.
The stock with the highest total risk that is the stock belonging to the Commonwealth Bank of Australia would not necessarily be the riskiest of the three stocks. This is because the risk value of the stock though, is as high as 23.33% but this particular stock obtains the highest return that is 1.22%. Therefore, the riskiest stock would be the one belonging to Woolsworth Group as it obtains the minimum return of 0.39% with the highest risk rate of 5.12%. Similarly, the return per total risk of Woolsworth is also the lowest (7.57%) reflecting that the particular stock is the riskiest.
The two components of total risk are as follows:
The particular ways in which the portfolio risk can be minimized are adopting techniques like diversification and proper allocation of the assets.
The beta refers to the measure of the volatility or systematic risk of a security or a portfolio in relation to the entire stock market. Beta is a function of both the business risk and the financial risk. The Capital Asset Pricing Model that is essentially utilized for the computation of the cost of equity can be calculated using the formula as stated below:
Cost of Equity = Risk Free rate + Beta * Risk premium
The beta of the three stocks suggests the volatility of a particular stock. This means higher the beta component of a particular stock higher is the rate of it being influenced by the rise or fall in the market. While, the stocks of Woolsworth and CBA reflect a beta value of 1.035 and 1.032, the stock of Wesfarmers reflects a lower beta value of 0.964. This mean that the stock of Woolsworth and CBA is much more exposed to the market than the stock of Wesfarmers.
The risk return relationship that can be observed from the above tables is that in case of Wesfarmers as the beta component is below 1, with the decrease in the rate of the risk, the rate of return also decreases (0.628% to 0.556%). However, in case of Woolsworth Group and CBA, the expected rate of return increases with the decrease in the rate of risk. This is particularly because of the fact that beta component of the stocks of Woolsworth and CBA is more than one.
The issue that has been proposed in this question is that being a finance manager a research proposal has been asked to be presented. The topic that has been chosen for the purpose of research is to find out whether the implementation of the internal control in an organization helps the management of the entity in achieving the company goals.
This particular research proposal aims to focus on the question that whether the implementation of the internal control in an organization helps the management of the entity in achieving the company goals. Internal controls refer to the set of controls that have been implemented within an organization for the effective execution of operational proceedings and in turn the achievement of the organizational objectives. Internal controls essentially mitigate the occurrence of fraud and other misstatements in the books of accounts. Thus, any control that has been established within an organization for minimizing risks involved in the day-to-day operations can be termed as internal controls. The advantage of implementing internal controls within the organization and the particular way in which the implemented controls have helped in the achievement of the company goals have been researched in this study. Therefore the research question that can be effectively framed is that whether the implementation of the internal controls are advantageous for the management of the organization (Yee 2017).
A literature review by different authors has also been conducted in order to construct a common view in regards to the particular topic of research.
Internal control refers to the set of controls that have been established within an organization for the purpose of strengthening the business operations and improving the quality of the work that is carried out in the regular course of business. An implemented internal control essentially acts as a catalyst within the organization (Selim 2014). This means that the implementation of the internal controls in the organization, influences the already positive regulations or policies in the organization. For instance, the implementation of a particular internal control like the segregation of duties can filter the operational proceedings of the organization from fraud and other misstatements. In case of a bank, the segregation of duties between different employees responsible for the collection of checks from a particular customer and encashment of the corresponding checks will definitely mitigate the chances of occurrence of frauds in the organization (Elbardan, Ali and Ghoneim 2015).
The other examples of internal controls that essentially improve the working of an organization are implementation of the technological controls, implementation of control in regards to the maintenance of records and conducting of the reviews in regular intervals of time. Thus, the internal controls are the fundamental points that are referred to by the mangers of an organization for the smooth working of business (Bartlett 2016).
The components of internal control that further improve the quality of the implemented controls are as follows:
The component of control environment restrains and shapes the organizational environment in such a way that the pitch of the organization is set. The employees of the organization are also made aware of the effectiveness of the internally implemented controls and how the particular controls will help the employees in carrying out their tasks.
The information and the communication component refer to the systems and processes that aid in the identification, capture and exchange of information in a structural system so that the members of the organization carry out the assigned responsibilities in a proper way.
Lastly, the component of monitoring and risk assessment is that component which is utilized in evaluating the effectiveness of implemented internal controls as a whole.
The benefits of the internal control according to (Byrnes 2015) might be summarized as the implemented controls within the organization that increase the efficiency of the operational proceedings of the organization. The implemented controls tend to simplify the work done by the employees by establishing clarified goals and strictly monitoring the procedures in which the desired results have been obtained (Jones and Beattie 2015).
However, the major benefit of the internal controls lies in the fact that these controls review the quality of the prepared financial statements. Thus, they facilitate the mitigation of the occurrence of errors, misstatements and fraud in the financial statements. Moreover, the implemented internal controls also lead to reduced lawsuit and insurance claims (Lisic 2016). Examples of effective internal controls like the segregation of duties, surprise review of the prepared financial reports, periodic quality check of the manufactured product or service and evaluation of the essential procedures in the manufacture of such a product or service are effective in mitigating the chances of fraudulent activities. Another potential advantage of the internal controls is that they help in the establishment of clear and concise goals that are easy to understand and implement. This not only benefits the company but also the staff and the other stakeholders of business (Kastberg and Österberg 2017).
The internal controls also pose a great help to the external auditor. This is because the proper implementation of internal controls within an organization automatically leads to the establishment of an ethical code. The employees of the organization effectively communicate with each other leading to the development of an environment, free of dishonesty and conflict of interest. This reduces the dependency of the employees over the management of the organization and makes the work force independent and effective. The periodic training sessions, which form a part of the internal control, would keep the skills of the employees updated with the technical implementation within the organization (DeFond and Lennox 2017).
Thus the particular outcome or hypothesis that can be chalked out from the above conducted literature review is that the implementation of the internal controls within an organization strengthens the operating structure of the entity and helps the particular company in achieving its goals.
This particular research proposal is based on the literature or the different journals that l have been prepared by various authors. The research proposal aims to bridge the gap between the theoretical knowledge and the practical implementation of the internal controls within an organization. It can also be assumed that this particular study will also be useful for the different stakeholders of business.
Conclusion
Therefore, it can be concluded from the above research proposal that internal controls have been an efficient tool in the hands of the management of an entity to identify or spot the fraud or irregularities in the regular business operations or the financial statements of the company which otherwise could not have been identified. An internal auditor who is especially responsible for the implementation of the internal controls within an organization, affix the suitable control and wait for the loophole in the operational proceedings to come up. There have been certain limitations of the already implemented internal controls but the major reason behind such a disadvantage has essentially been carelessness on the part of the staff of the organization. Thus, the implementation of suitable and proper internal controls within an organization effectively helps in the achievement of the company goals.
References
Bartlett, G.D., Kremin, J., Saunders, K.K. and Wood, D.A., 2016. Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing. Behavioral Research in Accounting, 29(1), pp.119-130.
Byrnes, P.E., Al-Awadhi, C.A., Gullvist, B., Brown-Liburd, H., Teeter, C.R., Warren Jr, J.D. and Vasarhelyi, M., 2015. Evolution of auditing: from the traditional approach to the future audit. Audit Analytics, 71.
DeFond, M.L. and Lennox, C.S., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp.591-627.
Elbardan, H., Ali, M. and Ghoneim, A., 2015. The dilemma of internal audit function adaptation: The impact of ERP and corporate governance pressures. Journal of Enterprise Information Management, 28(1), pp.93-106.
Jones, G. and Beattie, C., 2015. Local government internal audit compliance. Australasian Accounting Business & Finance Journal, 9(3), p.59.
Kastberg, G. and Ek Österberg, E., 2017. Transforming social sector auditing–they audited more, but scrutinized less. Financial Accountability & Management.
Lisic, L.L., Neal, T.L., Zhang, I.X. and Zhang, Y., 2016. CEO power, internal control quality, and audit committee effectiveness in substance versus in form. Contemporary Accounting Research, 33(3), pp.1199-1237.
Selim, G., Melville, R., D’Onza, G., Pelligrini, M. and Kotoupis, A., 2014. Internal audit around the world: a perspective on global regions.
Yee, C.S., Sujan, A., James, K. and Leung, J.K., 2017. Perceptions of Singaporean internal audit customers regarding the role and effectiveness of internal audit. Asian Journal of Business and Accounting, 1(2), pp.147-174.
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