In the current time of globalization and competitive business era, it is more important, essential and valuable for a company and its auditors to analyze and access organizational control/internal environment for the purpose to address inherent risks and weakness. This strategy could help a company in improving its productivity and overcome current and future business challenges. In addition to this, it should also be noted down that, an effective internal control environment is also essential to attain long term goals and achieve competitive advantages. It is because an internal control environment of a company or firm represents organizational internal position and situation. It is also reflect a company’s corporate culture, its leadership & management style, business policies, strategies, norms, values, HR norms, corporate philosophy. In the same way, internal control environment of a company consists with a lot of elements and components. In addition to this, it is also important and significant for a company and its auditor to address weaknesses and inherent risk from the control environment (Fearnley, and Beattie, and Brandt, 2005).
Basically, this research paper is based on the given case study that case indicates that, Everyday Supplies Pty Ltd is a single retail store firm that is providing different types of retail products/services to their customers, including tools, garden supplies, small appliances, lumber, electrical fixtures, etc. Moreover, it is found that, the internal control environment is not strong and appropriate that created a lot of issues in the front of the company. On the other hand, the case is also indicates that, there are several weaknesses exits in the internal control environment for the cash receipts and billing functions. So, in the context of this research paper, the weakness would be discussed in order to fulfill the aims and objectives of the study. Moreover, specific reasons or causes would also be analyzed behind such weakness in the internal control environment. Finally, specific strategies, methods, and ways would be proposed to the company in order to overcome such weaknesses.
Internal Control Weaknesses in Everyday Supplies’ Internal Control for the Cash Receipts and Billing Functions
In the current time, by addressing the weaknesses in the control environment, Everyday Supplies Pty Ltd could be able to prevent and deduct fraud and error and overcome potential inherent risk effectively. On the basis of given case, it is found that, there are several weaknesses related to the cash receipts and billing functions in the internal control environment that may create a lot of inherent risks and business challenges in the front of business owner. So, it is important to address such weaknesses and issues effectively (Fiedler, 2010). The following are the major weaknesses in the company’s internal control for the cash receipts and billing functions.
Approval of Credit without External Credit Check or Reference: This is one of the major weaknesses in the internal control environment of Everyday Supplies Pty Ltd. The case clearly reflects that, the credit manager of the company could approve credit to anyone on behalf of own perception. Moreover, the credit manager is only considered contractor’s reputation in order to approve credit that may create inherent risks and issues in the front of the company (Rezaee, and Riley, 2009). On the other hand, no specific and proper accounting rules, standards, norms and policies are used by the credit manger and company in order to approve credit. In addition to this, such types of functions may also generate the chances of fraud and misstatement in the company. The main cause of this weakness is lack of effective credit policies and standards. So, it is more important and valuable for the company and its credit manager to create, develop and use appropriate credit policies in the company in order to conduct credit functions effectively (Gray, and Manson, 2007). Hence, it is suggested to the company that it should follow proper rules and regulations of accounting and should develop an effective credit policy at the workplace in order to overcome this issue or weakness. Moreover, it is also recommended to the company that, the credit manager should not approve credit only on the behalf of contractor’s reputation. It means the credit manager should check and verify the credit and financial background of the customers or contractor before approving credit. Overall, it can be said that, the company and its credit manager should use proper and appropriate accounting standards in order to deal with such types of issues otherwise this may create a lot of serious challenges in the front of manager and company (Rittenberg, Johnstone,and Gramling, 2009).
Lack of Centralized System or Computer system: On the basis of given case, it is found that, the company does not have any centralized system or computerized system in order to run the functions related to cash receipts and billing. For case, currently the company is using manual delivery notes for the cash and billing transactions that reflect weakness in the internal control environment of the company (Puncel, 2007). Moreover, the company does not use any information technology or system to conduct the billing and cash functions. In addition to this, it is also accessed that, the accounting people or clerk of the company are conducting billing and cash receipts functions without independent manual or computer verification that may generate various inherent risk for the company in the future. The main cause behind this weakness is lack of appropriate technology and tools. So, it is suggested to the company that, it should perform all the billing and cash receipts related functions by using innovative information systems and tools. For example, the company should focus on investing on the new computerized or information system to overcome this weakness (Xinting, and Tomasic, 2010). In addition to this, the company should adopt a centralized computer system to check and verify the transactions related to billing and cash receipts. Hence, it can be recommended to the company to adopt and use new technologies, tools, information systems, and centralized computer system to deal with such issues. For case, with the use and implementation of computerized system, the company would be able to overcome the chances of inherent risks in the current and future. Moreover, the new system would also bring innovation, accountability, creditability, flexibility within the internal control environment of the company (Millichamp, 2002).
All the functions related to accounts receivable are performed and conducted independently by the supervisor: This is a main weakness in the control environment of the company that reflects shortage of employees in the company. In addition to this, this weakness is also present that a supervisor is conducting and performing the accounts receivable functions independently who have no proper and specific knowledge about the accounting rules, standards and norms. He could not accurately perform accounting functions effectively. For example, in the company, all the accounting and accounts receivable functions are completed by supervisor independently by only verifying pricing and other details. So, due to lack of accounting knowledge, he could not correct any errors (Probst, 2010). These errors may be come in the invoice of the company that may affect the financial strength of the company directly. Along with this, it is analyzed that, the main responsible factor for this weakness is lack shortage of accounting people/professionals and lack of accounting knowledge. So, on the basis of this weakness, it is suggested to the company that it should hire or recruit skilled, trained and experienced accounting professional those have full knowledge about the accounting. In addition to this, it is also suggested that, the company should provide and arrange training for their staff so that they could be able to understand and use accounting standards, rules and norms effectively in conducting the accounting functions (The Institute of Charted Accountants in England and Wales. 2003). Apart from this, it would also be important for the company to cross verify and check all the transactions of account receivable made by the supervisor in order to avoid inherent risk and future challenges. Finally, it is suggested that, the company must also develop the awareness among the employees about the importance and significance of using accounting standards and policies. This strategy would help the company in overcoming this issue in an effective and proper manner (Russell, 2005).
No independent verification of cash receipts with deposit slip or list of checks: The case indicates and reflects that, there is no responsible person who can verify cash receipts independently. In addition to this, the collected cash or credit is not verified by the cashier of the company with the bill of products. This is a major problem in the control environment of the company. Moreover, it is also analyzed that, the cash receipts is not compare with the deposit slip or list of check that may generate inherent risk for the company and could affect the growth and success. So, it is important for the cashier to cross verify cash receipts with the deposit slip on the time and regular basis in order to deal with this issue (Pickett, 2010). The main cause of this weakness in the company is lack of staff and lack of accounting software or packages. On the basis of this problem, it is suggested to the company that it should adopt accounting software or packages as per the organizational need in order to conduct the functions (Puttick, Esch and Esch, 2008). For example, with the effective use of accounting software, the cashier as well as company would be able to verify cash receipts with the depot slip in an effective and proper manner. Along with this, it would also be suggested to the staff and company that it should cross check and verify all the cash receipts in a pre-determined time period in order to avoid or deal with this major weaknesses (Pour, 2006). Hence, all these guidelines and methods should be used by the company and its staff for this weakness.
Authorization of write-off of Uncollectible Accounts: After analyzing and accessing the internal control environment of the company, it is found that, the bookkeeper of the company authorizes write-off of uncollectible accounts without an investigation into the reasons and details of each overdue account. This indicates that, the bookkeeper of the company is not effectively and properly performing his duties related to authorizing write-offs and recording journal entries (Salehi, 2009). This is a key reason behind this issue within the internal control environment of the company. So, it is suggested to the company and bookkeeper that they should not authorize write-off of uncollectible accounts without verification and investigation. Moreover, journal entries should be recorded in the books of accounts properly and effectively. Hence, all these methodologies should be used by the company in order reduce the negative impact of this weakness (Moeller, 2009).
Conclusion
On the basis of above discussion, it can be concluded and summarized that, in the current time, Supplies Pty Ltd may face several issues and inherent risks due to weaknesses in the internal control for the cash receipts and billing functions. In addition to this, it is analyzed that, a company should identify and address weakness in the control environment in order to overcome future challenges and improve productivity. Along with this, it can also be concluded that, by addressing and solving the weakness in the control environment could help a company in aligning its objectives with the business goals and mission. In addition to this, it is also valuable for the company to encourage good management at the workplace in order to deal with the future challenges and issues. On the other hand, it can also be said that, a company should adopt and use proper standards and norms of accounting in performing the transactions and functions related to the accounting, auditing and finance. Finally, it is summarized that, internal control environment of a company is not only represent policies and strategies but also provides strategies directions to attain long term goals and objectives.
References
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Gray, I. and Manson, S. (2007). Audit Process: Priciples Practice and Cases – Isa Edition. USA: Cengage Learning EMEA.
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The Institute of Charted Accountants in England and Wales. (2003). Reviewing auditor independence. Available At: https://www.icaew.com/~/media/Files/Technical/Audit-and-assurance/audit/guidance-for-audit-committees/reviewing-auditor-independence.pdf {Accessed On: 17 May 2017}.
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