Discuss About The Effect Internal Audit Function Management?
Internal control is the policy defined in an organization through which the organization can achieve its objectives most efficiently and comply with the regulations and defined policies. The strengths in the internal controls of Acid Pty Ltd. are :
There are various terminals and checks pre-determined at every level of the business cycle such as at the ordering department, sales department, dispatch office, stores department and the delivery department. Such terminals and check are very important for the business process to accomplish effectively (Elder et. al, 2010).
The orders are taken on a selective basis as the orders receive pass through the computer edit checks and those orders which are not up to the mark are rejected by the system. This ensures that only those orders are taken which can be fulfilled by the company with full accuracy (Vause, 2009). It helps in ensuring a better activity and enables the company to receive orders. Moreover, the orders that are fulfilled are undertaken ensuring that the business is not affected.
Although the order checking and accepting system is good, it may result in fewer orders and thus fewer sales as the orders would have been checked through some officials and if any adjustments or modifications could be possible for procuring orders, it would help in increasing the sales (Church et. al, 2008). Therefore, the process of evaluation will lead to fewer
The company takes the orders without checking the inventory levels. After taking the orders and going through different departments, the final orders are forwarded to the warehouse department where it is finally assessed by the store person and if the ordered goods are out of stock, the partial orders of goods in stock are forwarded to the dispatch department (Geoffrey et.al, 2016). Hence, the process of assessment is weak and will not help the company to enhance its sales. Moreover, the process is slow and will not help the company to attain a better prospect.
Lack of oversight and review is there by the owners towards the whole business cycle as there are different flaws in all departments and these would be identified only when the owners or the top level executives keep a watch on all the activities and processes of the business cycle (Church et. al, 2008).
The accounts receivables are updated in the master file on a daily basis but the same is not reconciled with the delivery receipts.
As there are no reviewing of the orders received from the customers apart from the computerized system, there is a possibility and might have been many cases where the order criteria may not have been found correct by computer system due to nonfulfillment of one or two criteria or may be due to any clerical error, but the same could be rectified or amended by the department head (Matthew, 2015). Due to complete dependency on computer systems for procurement of purchase orders, the company may lose many purchase orders in future which may further reduce the sales of the company and ultimately reduce the profitability.
The company takes the orders without checking the inventory levels. After taking the orders and going through different departments, the financial orders are forwarded to the warehouse department where it is finally assessed by the store person and if the ordered goods are out of stock, the partial orders of goods in stock are forwarded to the dispatch department. This may create great losses for the company in the form of –
Fall in the reputation of the company as the customers who have placed their orders will not get those goods delivered which are not in stock with the company. As the company had accepted the orders, it should fulfill the same. When these are not fulfilled, the reputation of the company in the eyes of the company will start falling considerably.
The company may incur losses as it might have to pay compensation to its customers for partial delivery of goods. Once a company accepts the orders, it becomes its obligation to fulfill the orders in time and deliver the complete orders. In case bulk orders are taken from big companies and orders are not completely delivered, the company may have to pay compensation to the ordering companies.
Lack of oversight and review is there by the owners towards the whole business cycle as there are different flaws in all departments and these would be identified only when the owners or the top level executives keep a watch on all the activities and processes of the business cycle. If the owners will not keep a watch and review on the business process, it may lead to various frauds and manipulations in the accounts, cash, and inventories by the managers or low-level workers of different departments (Johnstone al, 2014).
The whole business process is a very time-consuming process which may lead to more time taking in the delivery of orders. The time period between procurement of order and dispatch and delivery of orders increases due to such lengthy processes. The company should instead develop a shorter cycle to save time and money (Wood, 2011).
The accounting receivable are not tallied and verified on a daily basis by the company with the daily delivery vouchers. This may lead to the incorrect calculation of amounts receivable from customers.
Control risk assessment is a technique through which the risks are assessed so that the objectives for which internal controls have been implemented can be achieved (Gay & Simnet, 2015).
In the given case the assessment procedure of risks shall be set up department wise. If the sales system is taken here, then the risk assessment may be done using the following methods/ techniques:
The company and the management need to do in-depth study about the business process cycle and verify the reports presented by each department with regard to their follow-ups and actions taken in case of any problem has been assessed.
Internal control is the policy defined in an organization through which the organization can achieve its objectives most efficiently and comply with the regulations and defined policies (Gay & Simnet, 2015). The strengths in the internal controls of Cannon Pty Ltd. are :
The cheques from the customers have received through email This helps in keeping a track of the cheques received from the particular customers. Moreover, this process inconvenient in nature as it helps in providing a better grasp of the records.
All the cheques are crosses to ensure that the payments are going into the bank account of the company only. It is a better prospect as it leads to keeping a track.
Daily cash receipt reports are printed in the company. This enables the company to have a better management of the cash receipts.
The cheques are crossed after they are received in the sales order department by the credit control clerk. As the cheques are received through email and sales representatives, there are very high chances that the cheques may be manipulated and fraud may be committed because before a cheque is crossed, it remains a bearer cheque.
The details of cheques received are entered in the terminal at a later level. It should be done as soon as the cheques are received.
There is no check on the aging of debtors. Where the information regarding remittance advice is not adequate or is not attached with the cheques, the credit control clerk allocates the receipts to the oldest balance first.
There is no proper segregation of duties as the credit control clerk is only responsible for collecting the cheques and crossing them, entering details of the cheques in terminal and aging of debtors.
The cash receipts data and accounts receivable master file is prepared daily with the cheque details only before the cheques have been credited to the bank accounts. It may be possible that some cheques may get bounced but the accounts receivables have already been shown as cash received with the receipt of cheques (Carcello, 2012).
As the cheques are crossed after they are received in the sales order department by the credit control clerk, there are very high chances that the cheques may be manipulated and fraud may be committed because before a cheque is crossed, it remains a bearer cheque and the sales representatives and the person who receives the email may take full advantage of this limitation in the internal control (Carcello, 2012).
The details of cheques received are entered in the terminal at a later level. It should be done as soon as the cheques are received. Once an instantaneous recording of the cheque is done it leads to better transparency and elimination of any fraudulent activity. This delay in recording of cheques may lead to manipulation of cheques by the person responsible for collecting them (Heeler, 2009). By keeping a track of the cheques received at the initial level only, this problem can be avoided.
There is no check on the aging of debtors, and further, where the full information is not received along with the cheques, the allocation process gets disturbed. Also, there is no clarification sought immediately from such debtors.
As there is no segregation of duties and numerous duties have been handed over to one person only, there are major chances of mistakes and errors due to overburdening of the person which is the credit control clerk. Hence, the company should appoint one or two more persons so that the duties can be segregated (Black, 2010).
The cash receipts data and accounts receivable master file is prepared daily before the cheques have been credited to the bank accounts. It may be possible that some cheques may get bounced but the accounts receivables have already been shown as cash received with the receipt of cheques (Reding et. al, 2015). The company should record the amounts received only when the cheques are encased or credited to the bank accounts of the company.
By enquiring about the cash receipts system and its process from the management team and the other designated personnel of cash receipts management team.
By observing the whole process followed by the cash receipts management team.
By checking the mails register and also the registers maintained and signed by the sales representatives.
By accessing the accounts receivable registers. This will provide a better view of the accounts receivable and hence, the appropriate decision can be taken regarding the funds.
By reconciling the bank accounts with the cash receipts reports and bank deposit slips. The reconciliation will help in providing a better response and any differences can be easily negated.
All these assessment techniques will help the company in finding out the internal control risks and also help in advising the management on how to remove the said weaknesses in the internal controls.
References
Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises, Working paper, University of Missouri-Kansas City.
Carcello, J 2012, ‘What do investors want from the standard audit report?’, CPA Journal vol.82, no. 1, pp. 7-12
Church, B, Davis, S & McCracken, S 2008, ‘The auditor’s reporting model: A literature overview and research synthesis’, Accounting Horizons vol. 22, no. 1, pp. 69-90.
Elder, J. R, Beasley S. M.& Arens A. A 2010, Auditing and Assurance Services, Person Education, New Jersey: USA
Gay, G & Simnet, R 2015, Auditing and Assurance Services, McGraw Hill
Geoffrey D. B, Joleen K, K. Kelli S & David A. W 2016, ‘Attracting Applicants for In-House and Outsourced Internal Audit Positions: Views from External Auditors’, Accounting Horizons, vol. 30, no. 1, pp. 143-156.
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting. Pearson Press
Johnstone, K, Gramling, A & Rittenberg, L.E 2014, Auditing: A Risk Based-Approach to Conducting a Quality Audit, 10th Edition, Cengage Learning
Reding, H.R, Sobel, P.J, Anderson, U.L, Head,M.J, Ramamoorti, S, Salamasick,M & Riddle, C 2015, Internal Auditing: Assurance & Advisory Services, 3rd Edition, The Institute of Internal Auditor Research Foundation
Matthew S. E 2015, ‘ Does Internal Audit Function Quality Deter Management Misconduct?’, The Accounting Review, vol. 90, no. 2, pp. 495-527
Roach, L 2010, Auditor Liability: Liability Limitation Agreements, Pearson.
Vause, B 2009, Guide to Analysing Companies, Bloomberg Press
Wood, D A 2011, ‘The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision,’ The Accounting Review, vol. 86. no. 6
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