Importance Of Internal Control In Accounting: An Essay On Auditing For Good Analytical Research.

Internal Control

Discuss about the Auditing for Good Analytical Research.

The accounting methodology is as old as most of our basic mathematics that we practice in our daily life. Its importance has played a key role in the financial industry ever since the era of banking industry had commenced. From the past till today accounting is often reflected as auditing for a huge amount of ransom, assets and any other entity which add value to an individual or organization.  With the heavy involvement of the financial industry, thus, it is essential for accounting to integrated policies, standards, protocols and other ethics to have better control of practices with high integrity which classifies into a single term, internal control. Referring to the above quote, the author`s view of internal accounting control may seem to provide more favourable arguments rather than against. But no ideology can be perfect. Firstly, this essay will contribute a fair illustration of the relationship between strong accounting system and legal practices. Then, the importance of the existence of internal controls. Lastly, it will instigate the beneficial and loosing arguments of internal accounting controls referring to the best practice preferred by the organization.

Internal control can be described as a process through which the organizations are able to coordinate the activities and put a bar on the fraudulent activities by the management, as well as the employees (KSU, 2016). For an effective planning, as well as control it is essential to have a well-defined internal control mechanism that will trace the deficiencies and bring transparency in the working. The element of internal control is assessed during the planning stage of the audit of a financial statement (Gilbert et. al, 2005). The outcome of the impact is directly in tune to the auditor’s stage of testing in detail.  To lessen detailed testing, the organization needs to have a strong system of an internal control.

Internal controls are part and parcel of organization policies that pertains to finance and business. It comprises of all the actions undertaken by the management for the safeguard of the resources in terms of waste, fraud, and efficiency (KSU, 2016). Secondly, it helps in bringing accuracy, as well as reliability in accounting and operation of data. Thirdly, it enables a strong compliance with the regulations set by the organization (Hoffelder, 2012). Lastly, it helps in assessment of the performance of all the units of the organization. Internal control is simply a good practice that steers the business in an ethical manner.

Components of an Internal Control System

The internal control system is put into practice by the management or the ones who are entrusted with the duty of ensuring strong governance. It ensures that the compliance is done in terms of rules and regulations (Schaeffer, 2006). Moreover, it leads to efficiency in terms of operational efficiency. This can be possible when the internal control system is put into implementation through elements or subsystems and are termed as the components of an internal control system. It has five major components:

This simply means a well-equipped environment of the entity where the operations of the business happen. A controlled environment enables strong control and keeps the wrong practices at bay. For example, if the organization is authentic and strict towards the false practices then the employees will fear in any kind of falsehood. This will ensure commitment and keep the fraud away (Manoharan, 2011).  Moreover, an auditor needs to have a proper understanding of the environment and determine whether it is implemented by the management and the behavior.

Process of Risk assessment

One of the major roles of internal control is to trace and rectify the misstatements. Further, it needs to be noted that management will not wait for the happening of the misstatement rather it will find a measure to detect and correct it (Ingram, 2016). The entity develops the process of risk assessment that helps in identification of the material misstatement (ACCA, 2016). The auditor obtains a clear notion of how the process of risk evaluation process is working and whether it is shedding light on the risks that are expected, the influence of such a risk, an event of happening of such a risk and decision that pertains to such a risk (Harrington, 2003).

Information has assumed a vital place in the space of business environment. When an audit engagement happens, an auditor adds to his understanding of the information, as well as a system of communication that is one of the elements of the accounting system (Ingram, 2016).  But, it is not always alike as the accounting system. It I described as the system through which the management develops a link with the internal and external environment.

Control mechanisms

Controls are mechanisms that are implemented by the management to ensure that the financial information is reliable. An apt example is that of the debtors that cannot be written off without the consent of the finance director or any other relevant person. In a similar scenario, credit sales cannot be done until a recommendation is taken from the credit control department (Schaeffer, 2006). Such activities do not constitute authorization.  A need to enter the password in certain modules of an information system is a classic example of the information system.

Advantages and Disadvantages of Internal Control

Monitoring

The last element of an internal control system is the process of monitoring. It can be treated as a service that is inbuilt to the system of internal control and evaluates the skills of an internal control system. The process of monitoring is done by evaluating the internal control operation that pertains to the current period and assessments that are separate in nature that includes routine and non-routine checks (Christensen, 2011). Such an evaluation requires external information like the feedback of the customer. Hence, the ones who are entrusted with the responsibility of governance take an appropriate step so that any risk or material misstatement is warded off with ease and flexibility.

Internal control system will lessen the amount of audit work and this will have a positive impact because the auditors will be able to use system based audit that will enhance the level of audit work. Moreover, the presence of a strong internal control mechanism reduces the chances of frauds, as well as errors and will bring new supervision (ACCA, 2016). This will accelerate custody and the third party liability will be minimized bringing a great deal of speed and accuracy.

Secondly, internal control lessens the audit evidence that needs to be produced as it enhances the audit evidence to be present within the business. This helps to frame a view that leads to speed and evidence (ACCA, 2016). Moreover, the presence of this control system solidifies the audit evidence that needs to be gathered. It reduces the work overload and reduces the time that is needed to prepare a report (Kruger, 2015).

Last but not the least it provides a strong internal function that enables the auditor to focus more on the problem and facilitate the work. Further, it facilitates the company’s assets.

The presence of internal control might lead to error and fraud because at times the major reliance is on the strength of internal control and this exposes the auditor to the liabilities that is civil in nature.

Secondly, the presence of internal control lessens the volume of scrutiny that needs to be done by the auditor leading to smaller samples hence, leaving another area prone to fraud and problems.  Collusion, as well as manipulation might lead to mismanagement and hence, a biased report might occur.

Further, the vigilance of an auditor is reduced owing to the internal control and hence, impacts the audit quality. It has the chances of being abused by the internal auditor through collision with the management.

Gamers Den is situated in Cambridge (United States) and has a huge selection of games. It is strongly involved in providing an environment that is safe and friendly for the community at large. People can come and play their favourite games. The availability of a dedicated area makes it one of the best places to be in. Many events are even conducted that that attracts and accommodates various players. This keeps the store busy. Further, the presence of less number of employees makes it less complicated.

The current internal control mechanism of the gamer den is straightforward. Two game designers are involved in the process that is designed, as well as promotion. On the other hand, two main assistants are present that is Phil and Amy and another employee is ELLA. The policies that the company follows are weak in terms of an internal control. During the hours of business, an amount of less than 50$ can be withdrawn from the cash register. Credit sales are available with a defined time period and according to the customer comfort that is weak in nature. Further, a single cash register is present that lacks all the entries and physical stock counting I unavailable. Moreover, a problem with the physical counting of the stock has appeared. Therefore, cash is collected and remains in the office till a person deposits it to a bank. Further staffs have an access to borrow iPad, laptops, etc. and there is no trace of the current items.

A strong system that needs to be developed for Gamers Den will require a proper number of stuff. When the number of employees will be more, the work responsibility will be divided that will lessen the pressure (Lapsley, 2012). Further, the internal control must be structured in a manner that will lead to proper allocation of person who can shoulder the responsibility. In the present system, there is no availability of financial records and information lacks reliability. The accounting control will be a boon to the business. The system of accounting control will help the organization in many ways (Kaplan, 2011). The system of inventory will be maintained in a proper manner, before the issue of stock the authorization and approval will be needed. Further, budgetary control will aid the organization that will enhance the profit with the sales volume. The review of assets will be easier and hence, variances can be traced.

Conclusion

The above report provides a clear cut indication that internal control is vital in the smooth running of the organization. It leads to a strong control over the activities that is not witnessed in an organization that lacks internal control. Therefore, internal control brings a wide variety of advantages that helps in steering the business. This leads to a strong momentum and helps the organization as a whole. When internal control is into practice it leads to an enhanced level of accountability and responsibility.

References

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Christensen, J. 2011, ‘Good analytical research,’ European Accounting Review, vol. 20, no. 1, pp. 41-51

Gilbert, W. Joseph J and Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92

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Ingram, D 2016, What Are the Seven Internal Control Procedures in Accounting?, viewed 15 October, 2016, https://smallbusiness.chron.com/seven-internal-control-procedures-accounting-76070.html

Kaplan, R.S. 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp.  367–383.

Kruger, P 2015, Corporate goodness and shareholder wealth, Journal of Financial economics, pp. 304-329

KSU 2016, Internal Audit, viewed 15 October 2016 https://www.k-state.edu/internalaudit/internal-controls/

Lapsley, I. 2012, Commentary: Financial Accountability & Management, Qualitative Research in Accounting & Management, vol. 9, no. 3, pp. 291-292.

Manoharan, T.N. 2011, Financial Statement Fraud and Corporate Governance,  The George Washington University.

Schaeffer,M 2006, Internal control breakdown study, viewed 15 October 2016 https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2009/CorpFin/IntControls_Breakdown.jsp