Regardless of the business size, all the business entities are vulnerable to frauds particularly the small business entities are victimized in the larger percentage of situations. As stated by Stewart and Shamdasani (2014) the components of internal control mainly consists of the inter-related components that are treated as the criteria in determining and attaining the effective internal control system. The components of internal control are derived by the corresponding management style and philosophy that are different from the entities and are attached with the process of management. The components of internal control are adjusted by the management in most often situations to meet the needs of the small entities (Chan and Vasarhelyi 2018). This includes undertaking a directive approach towards attaining the desired outcome with the clear direction and strong drive by the management of small entities to achieve their objective. The components of internal control are adjusted in a manner that it is related to the higher level directions with positive arrangement of encouraging the employees.
The management of companies often direct the internal control components that are designed to make an attempt towards preventing the undesirable violations or situations that leads to the irregular activities and occurrence of fraud (Hayes, Gortemaker and Wallage 2014). In other words, the management of small entities designs the internal control policies in order to avoid the loss or damage with an attempt of minimizing the risk. Management often applies the preventive control in their regular work of employees in compliance with the differences in the functions and accountabilities such that the division of responsibilities and obligations with mutual supervision and validity of work is maintained (De Paula 2016). The internal control components are adjusted by the small entities in manner that it is able to identify and recognize the errors that may occur in the daily business activities.
Adjusting the components of internal control results in positive consequences and also advantageous in keeping a positive flow of internal controls (Louwers et al. 2015). The advantages are as follows;
Apart from the advantages of the internal control there are certain disadvantages that are related with internal control;
Findings from the studies have suggested that poor internal control and override of internal control might result in business frauds. Therefore, strong internal control system would act as the best policy in protecting the small business from every type of fraud.
Findings from the case study suggest that the current accounting practice of Hello World initially involves recognition of importance of proper and adequate accounting system for the company. The accountants are found to be taking information depending upon the accounting records and documents or the summary of accounts voucher so that the accountants can enter data into the computer system. Based on the understanding of the current accounting practice at Hello World several suggestion can be made for the internal control solutions based on the major functions of departments.
Segregation of duties can be regarded as the most preferred and effective process of implementing control activities at the Hello World. This activity can be treated of fundamental importance at Hello World because financial fraudulent subject is increasingly turning out to be serious issue. If Hello World takes the advantage and implement the preventive activity control in their computer accounting system then they prevent in advance several misappropriate management of cash and asset. Based on the principle of segregation of duties the related financial activities should be conducted by different people.
Cash Accounting: Findings suggest that the cash management and numerous accounting data is only managed by one person who later delegates the duty to sub-ordinates. It is necessary that segregation of duties must be done where one person cannot be held responsible for accounting records (Clinton, Pinello and Skaife 2014). A review and oversight on cash account should be made. Furthermore, it is recommended that each transaction with cash must be documented by the appropriate form and signature of the cash manager.
Accounts receivable: The segregation of duties must be made at Hello World as accounts receivable significantly vulnerable to fraud. The board of directors and the accounting managers must review the reports relating to the collection, billings and writing offs. Such activities would empower the manager to keep a check on the cash flow and forewarn the directors regarding any unofficial write offs. The system of order must be control correctly under the approval of the accounting manager.
Accounting reconciliation and analysis: Following the access control and description of job, accounting reconciliation and analysis is regarded as the third most vital group of the basic controls. One of the vital ingredients of successful frauds is the successful concealment. It is recommended that the regular, corrective accounting reconciliation and analysis would make the concealment difficult or impossible (Demirakos 2018). Performing of accounting reconciliation on the monthly basis should be carried out by the board of directors in the areas of bank reconciliation for the accounts.
The board of directors should also review and oversight the accounts receivable reconciliation from month to month and the general ledger to sub-ledger. A review should also be conducted by the board of directors in the areas of accounts payable reconciliation for both month to month and the general ledger to sub-ledger. Therefore, such procedure can be helpful in highlighting the discrepancies that results in misappropriate of accounts and cash.
Management Letter
To Tim and Abi Scott
From ABC Consultants
Date: 16-10-2018
Dear Tim and Abi
We wish seek your valuation attention towards our letter relating to the importance of having internal control at Hello World. The internal control acts as the filter throughout the entire business. The internal control policies are helpful in aligning with the objectives of business and helps in making sure that the process of reporting that are carried out at Hello World are in accordance with the objective of business. Having internal control policies at Hello World would help in safeguarding the business assets as the system makes sure that physical and monetary assets are safeguarded from fraud and errors of misjudgement.
The internal control policies not only detect frauds and error but also helps in promoting better management. Having internal control policies at Hello World would ensure that systems recognize any error quickly as and when they occur. Apart from this, the internal control policies would allow the managers to receive the appropriate information in the timely manner regarding the performance of any target along with the vital figure than reflect variations from the target.
The internal control policies helps in minimising the chances of unanticipated errors at Hello World. Implementing the internal control at Hello World would ensure segregation of duties and appropriate financial reporting. As understood maintenance of accurate and complete reports is usually required by the legislation and management. Therefore, the application of internal control policy would help the management in minimising the lost time of correcting the errors and making sure that the resources of the business are effectively managed.
We anticipate that the letter has served your purpose of implementing the internal control policies and look forward to hear from you soon.
References:
Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.
Clinton, S.B., Pinello, A.S. and Skaife, H.A., 2014. The implications of ineffective internal control and SOX 404 reporting for financial analysts. Journal of Accounting and Public Policy, 33(4), pp.303-327.
Cook, W., Van Bommel, S. and Turnhout, E., 2016. Inside environmental auditing: effectiveness, objectivity, and transparency. Current Opinion in Environmental Sustainability, 18, pp.33-39.
De Paula, F.R.M., 2016. The principles of auditing a practical manual for students and practitioners. Isaac Pitman & Sons, Ltd (1919).
Demirakos, E., 2018. Internal Auditing: Assurance and Advisory Services, UL Anderson, MJ Head, S. Ramamoorti, C. Riddle, M. Salamasick, PJ Sobel, The Internal Audit Foundation (2017), 627 pages, $199.99, ISBN: 978-0-89413-987-1.
Hayes, R.S., Gortemaker, H. and Wallage, P., 2014. Principles of auditing: an introduction to international standards on auditing. Prentice Hall, Financial Times.
Kumar, R. and Sharma, V., 2015. Auditing: Principles and practice. PHI Learning Pvt. Ltd..
Li, C., Raman, K.K., Sun, L. and Wu, D., 2015. The SOX 404 internal control audit: Key regulatory events. Research in Accounting Regulation, 27(2), pp.160-164.
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.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing & assurance services. McGraw-Hill Education.
Stewart, D.W. and Shamdasani, P.N., 2014. Focus groups: Theory and practice (Vol. 20). Sage publications.
Vovchenko, G.N., Holina, G.M., Orobinskiy, S.A. and Sichev, A.R., 2017. Ensuring financial stability of companies on the basis of international experience in construction of risks maps, internal control and audit. European Research Studies Journal, 20(1), pp.350-368.
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