The methods which are applied by an entity and which give promise to accomplish the aims and objectives set by an entity from its business processes are called as internal control system of an entity. It helps in attaining the goals of efficient and effective reporting by management and auditor about the affairs of the company, proper and timely compliance of rules and regulations lay down by government.
The internal control weakness is defined as a deficiency in the systems designed and employed by an entity to ensure effectiveness in the working of an entity in relation to aim and objectives set by an entity.
In the given case of Alex Blenheim Pty Limited, to assess the weakness in internal control system firstly the assessment of internal control environment and its effect on company policies and procedures is require to be done.
The control environment of an entity is base for efficient and effective reporting of the financial and non financial matters to the stakeholders of entity both internal and external for achievement of aim and goals set by strategic objectivities if an entity and it is the foundation of effective control system in an entity.
The Alex Blenheim may objective is to reduce the cost of goods to company including the overheads costs or by achieving the high volume of sales as the company is low margin company. The company is planning to reduce the levels of inventory, early receipts from debtors and early payments to creditor to increase the working capital margins of the company.
The company is maintaining very goods internal control policies in relation to Inventory of Raw Material, Work in Process and for finished goods. The company is maintaining the computerized system of internal control of inventory. It contains all the five elements which are required for good internal control system. The elements of good internal control systems are Control environment, Entity’s risk evaluation process, information system, control activities and review of internal controls to reduce the weakness of controls are presents in company internal control policy of inventory.(Scaldeo,2013)
A good internal control in relation to inventory involves the controls which enables an entity to:
If any of the above is followed in making controls of inventories, there is weakness in controls relating to Inventory.
The following are weakness in the internal control of inventory in Alex Blenheim Company:
The weakness could impact the working of an entity and hampers the ultimate objective of the company which the company is required to achieve by implementing the controls systems. The weakness can damage the effectiveness and efficiency of business control environment which are root causes for business risks in any business.
The major impacts of weakness are:
Steps Taken To Reduce The Imapct Of Risk In Internal Control System
The following are the steps taken by an entity to reduce the impact of risks in internal controls:
Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, 90(2), 529-557.
Salcedo, C. A. G., Hernandez, A. I., Vilanova, R., & Cuartas, J. H. (2013). Inventory control of supply chains: Mitigating the bullwhip effect by centralized and decentralized Internal Model Control approaches. European Journal of Operational Research, 224(2), 261-272.
Strand L, (2014) , “10 Common Internal Control Deficiencies Found in Small Business” available at https://www.lbahs.com/blog/bid/397513/10-common-internal-control-deficiencies-found-in-small-businesses accessed on 06/05/2017
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