Internal Controls
Internal controls are measures that are an essential part of the business and financial procedures and policies of a company. These controls help to enhance the accuracy of accounting records, reliable financial reporting, compliance with the applicable laws and regulations, and efficient operations by reducing the risk of unintentional mistakes, intentional mistakes, and misrepresentations (Weygandt, Kimmel, & Kieso, 2008). Internal controls also assist with safeguarding the assets of a company from employee unauthorized use, theft, and robbery.
The 2002 Sarbanes-Oxley Act changed the way companies do business. This act put in place guidelines to help strengthen the weaknesses in the internal controls of companies (Weygandt, Kimmel, & Kieso, 2008). The act requires companies to implement internal control provisions to meet the requirements of the SOX act which help to minimize the occurrence of unethical behavior and corporate fraud. The SOX act also includes reporting requirements for companies that help ensure proper revenue recognition.
A company that announces deficiencies in its internal controls would most likely experience a fall in the price of its stocks because this could be an indication of either mistakes or misrepresentations in its accounting practices and leads to the belief that financial statements released earlier are different than reported. The announcement of deficiencies causes a lack of faith in the operations of the company which could cause the company’s stock to drop immediately, while investors begin to establish the extent of the damage.
There are some possible limitations in the efficiency of internal controls. Some specific limitations can consist of human factors or system omissio...
... middle of paper ...
...is that of the store manager or supervisor who at the end of the shift verifies the accuracy of the cashier’s cash register drawer. Someone in a higher level of management may verify that the store manager performed the check of the cash register drawer. When discrepancies are found they should be reported to a level of management that is able to take the appropriate corrective action.
Internal controls are used much more today than in times past due to the fraud and unethical behavior that occurred at companies such as Enron. Internal controls help companies to avoid major issues and achieve goals. Two of the main goals of internal controls consist of safeguarding assets from unauthorized use by employees and helping to enhance the accuracy of accounting records. These goals are vitally important for a company to help avoid unethical behavior and corporate fraud.
Implementing strategies to create an effective internal control environment is needed to prevent and detect controls of fraud (Murphy, 2015). Control is needed to combat fraud, enforcing employees and volunteers to do the right thing. Management must have control of the organizations operations to tackle risks when they arise (Arshad et al, 2015). According to Arshad et al (2015):
Internal controls are in place to protect entities against theft from dishonest workers and outside predators. They are also an accurate series of checks and balances and are in place to find discrepancies.
In conclusion, internal controls include separation of duties, assignment of responsibilities, third-party verification and the use of mechanical and physical controls. In and of themselves, these tactics stop and prevent much abuse of the bookkeeping and accounting systems. The addition of Sarbanes-Oxley requirements in 2002 require that a company enact internal controls and assign responsibility of the control system to executives and directors, further providing insurance that financial reporting is accurate. Without this insurance that reports are accurate, company stock will fall and investors will be lost. Even with intrinsic limitations, the positive aspects of good internal controls far outweigh the negative implications. Good internal controls equal accurate financial records and future company success.
According to PCAOB Auditing Standard 5 paragraph 2, “effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. If one or more material weaknesses exist, the company 's internal control over financial reporting cannot be considered
ensure that management is doing what it can to establish means of effective internal controls by having to report on them.
What is internal control? According to University of Phoenix, Axia College Internal Control and Cash (2009), internal control is all of the related methods and measures adopted within an organization to safeguard its assets and enhance the accuracy and reliability of its accounting records. The primary reasons for internal control are help companies protect their investments and merchandise against theft from everyone, including employees and to make sure that the accounting is done correctly and truthfully.
The COSO Internal Control—Integrated Framework provides a blueprint for implementing an internal control system to assist in ensuring the reliability of financial statements and compliance with Sarbanes-Oxley legislation. The purpose of internal control is to provide reasonable assurance in achieving internal control objectives: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with laws and regulations
Internal controls are a big factor in a company’s growth and value. Proper accounting practices are a big part of this process. Following the scandal caused by the unethical practices used by companies such as Enron, Tyco, Global Crossing and Worldcom, the Sarbanes-Oxley Act of 2002 was enacted. This act held companies accountable for their actions. Companies could either face fines, imprisonment or both if the act was not followed. Also, if there are deficiencies in a company’s internal control, stock prices can plummet. There are many physical, mechanical and electronic controls involved in internal controls. Some of these are good controls while others, even though helpful, are not as effective as others.
Since the implementation of SOX, companies are required to establish effective and efficient internal controls in order to be in compliance with the SEC requirements (Jahmani & Dowling, 2015, p. 129). According to COSO internal control is defined as “a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objectives: 1. Reliability of financial reporting, 2. Compliance with laws and other regulations, 3. Efficiency and effectiveness of business operations, and 4. Protection of property” (Kanagaretnam et al., 2014, p. 30 & Kapic, 2013, p. 63). Additionally, Kapic notes internal controls contain policy and procedures that assist the company and management with smooth operations of all daily business
Internal fraud is one of the biggest threats to new businesses. Employee theft is responsible for almost one-third of business failures according to the US Chamber of Commerce. Strong internal controls act as
It is important to develop and maintain internal controls inside nonprofit organizations because they assist in maintaining ethical standards. According to the National Council of Nonprofits (NCN) internal controls are financial management practices which are systematically used to prevent misuse and misappropriation of assets
Internal management defined in accounting and auditing is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization. It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organization's resources, both physical and intangible.
The role of internal control to restrain the corruption in organisation is to adopt the integrated control framework to institute the internal written policies and procedures in offer to provide reasonable assurance to management and ensure compliance with the applicable rules and regulations (National Internal
Overall, the company is having ineffective controls regarding different departments and in the whole organization. An effective internal audit department should be established within the organization which should test the effectiveness of these controls on regular basis and make it sure that all controls are working effectively and efficiently with the different departments of the organization. Also the Internal auditor should implement the most effective processes and measures to prevent and detect the fraud, corruption and non compliance with the laws and regulations in the organization. Establishment of internal audit committee would be helpful in this regard which comprises of executive and non executive directors.
It is not detected, prevented or modified on a timely basis by client’s internal control system. It will occur in account balance, disclosure or class of transactions. This risk is a function of the effectiveness of the design and operation of an entity’s internal control. The control risk may not be zero, it may be minimal. Some control risk may always exist, it is due to the inherent limitations of internal control.