Identifying Internal Control Procedures to Mitigate Risks in the Marina and Slipway
1.For each of the risks identified in A to E, determine a practical internal control procedure that would assist in mitigating the risk identified.
2.From the information above, identify five (5) significant general control weaknesses.
The company operations
The chosen company of Mallacoota Marina Limited which is the operator and the owner of a commercial marina and slipway. The slipway is engaged in ongoing repairs and slipping of boats moored at the marina. The slipway manager is responsible for raising the initial work orders which are then sent to the administration area for invoicing.
The administration of the company
In the context of the administration there is the finance manager and a bookkeeper. The responsibility of the bookkeeper is to undertake all invoicing and banking, and follow-up of the accounts that are outstanding. A monthly report of amounts invoiced, banked and outstanding debtors is given to the finance manager. They are engaged in three full-time staff and up to ten casuals at any time. Overtime is often worked on weekends by all the staff.
In case of Inventory they consist of mainly paint, along with some expensive electronic boating equipment, is stored in the slipway warehouse which is accessible by all staff on the basis of as on when needed, it is based on a work order that are raised by the manager of slipway.
The current issue
The issue lies that there are various types of risks that are associated with the business the study has highlighted the various risks and the control steps for mitigating the identified risks. The following represents the various risks that are associated with the same:
- Non-collectability of debts: The risk of non-collectability of debts includes the amount of the company that is not collectable from the debtors (Harned, Lungu, Wilks and Linehan 2017). This happens when Mallacoota Marina Limited sells their goods on credit. Although the credit sales helps in enhancing the sales but exists a risk of bad debts. Basically the risks is the loss of amount due to monetary amount that cannot be recovered from the buyers on credit. In order to lower down the risk the primary step is to reduce the number of credit sales offered to the buyers. The company must ensure that the bills are cleared on time. The company must ensure that the payments that are overdue must be cleared on time (Ismail and King 2014). Moreover the company must analyze the reason for which the customer is unable to pay the amount. This involves in checking whether the customer is having a problem with the product or whether the customer has any cash flow problem. The company must also evaluate the type of accounting or payment system associated with the transaction in order to mitigate the risk (Renz and Herman 2016).
- Potential understatement of revenue: This is the risk that takes place in the internal control of the business where the amount of the revenues are misstated and shown at a lesser value. This causes the expenses to be understated. This both results in the inaccurate measurement of a business financial position and can cause the owner to make improper business investments and change his tax liabilities. Although understatement commonly takes place on balance sheets, the effects of erroneous accounting will affect the income, cash-flow and owner's equity statements of Marina Limited (Sudaryanti, Sukoharsono, Baridwan and Mulawarman 2015). This takes place when the business internal may fraudulently make understatements of liabilities on their balance sheets to show more profits to investors. They may understate their assets to lower their federal and state taxable income. Business owners who use this method will usually keep two sets of books, one for official purposes and the other to keep track of their actual finances. As a mitigation the company must ensure a good supervision of the activities and must conduct a proper audit of the internal control and also the financial reports.
- Overpayment of overtime to employees: In Marina Limited the employees are engaged overtime which is worked on weekends by all the staff and payment is done accordingly. This issue lies here that the internal finance manager has been paying the employees more than the actual payment in terms of over time payment. Although the authorized rate of payment is not actually what has been paid go the employees. Salary overpayments can result from errors in gross or net salary. The gross salary overpayments include payment of overtime to the wrong employee, miscalculation of overtime, and incorrect pay rates. Net salary errors may also occur when a required deduction is not taken (Torabi, Giahi and Sahebjamnia 2016). An employee who discovers that they has received an overpayment of wages or salary must immediately notify to the finance manager. The finance manager must be informed and steps to reduce the amount of payment in terms of overtime payment.
- Inventory being stolen: The next risk lies in the business is the issue of the inventories being stolen. The Inventories consist mainly of paint and some expensive electronic boating equipment, is stored in the slipway warehouse which is accessible by all staff on the basis of as on when needed, it is based on a work order that are raised by the manager of slipway. At times the company may discover that the inventories are missing this can be due to the reason of theft since all the members have the access to the warehouse (Mårtensson, Höglund, Holmgren Caicedo and Svärdsten 2016). The primary step for the mitigation of the risk is to Spot the unusual trends in certain financial ratios involving inventory and detect inventory theft, which is the removal of inventory from storage for personal use or resale Marina Limited while analyzing the risk factors of inventory fraud must look for the errors or misstatements in reported inventory balances. The process of overstating and understating the ending inventory balances can inflate and reduce profits, respectively. Overstated profits make management look good, while understated profits reduce taxable income.
- Payments being made twice to the same supplier: This risk may mistakenly occur when the payments are made twice to the supplier. It can be said to be a major financial drain faced by the organizations at present, where accidently the management may pay the same invoice twice. As a solution to the issue the accounts payable system should be redesigned to accommodate only one vendor master file record for each supplier. However, there are some activities that can prompt the duplication of a vendor master file. In addition to this there must be double check for misleading and misreading of the payments. The company must ensure that there’s a solid backup and that payment information is entered into the system immediately upon issuing the check (Eldenburg, Wolcott, Chen and Cook 2016). The best way to prevent the risk is to get the vendors send the invoices one way. If the accounts payable department has one way of receiving invoices, it will be able to more easily track and identify duplicate invoices.
The key modules of Financial Management System (FMS) of BAS Limited are at present undergoing the significant modification. The systems analyst who initially implemented the FMS was dismissed recently due to a disagreement with the IT Manager.
The chosen company of BAS Limited has its IT function under the control of the Finance Director. The day-to-day activities are the responsibility of the IT Manager who has had substantial IT experience in an environment of large multi-user. After a few days of dismissal, the systems analyst returned to BAS Limited’s IT department and made some unauthorized changes to the FMS.
Succeeding to the notice of the systems analyst, the FMS development work lost their direction. The programmers, who received their detailed instructions from the systems analyst, had no written instructions or documented system specifications for the FMS modifications. All such specifications and specification had been given verbally by the systems analyst.
Significant General Control Weaknesses in BAS Limited's Financial Management System
When Monica Nagpal as an appointed auditor of the BAS Limited visited, only the IT department staff are allowed access to the IT department. However, she was being able to enter the department and review existing FMS documentation, and make changes to a FMS program under development via a terminal which was logged on but not attended by any programmer. During this period, she was not asked for identification and was left alone for long periods of time part of the audit planning process.
The following issues during her preliminary assessment she identified that, When the company does not have any adequate controls in financial management, the true financial situation of the company cannot be analysed (Eldenburg, Wolcott Chen and Cook 2016). The report may have an incorrect amounts for the regulatory purposes and authorities of tax. The financial management controls weakness may have clear causes and remedies. The BAS Limited must identify the problem areas, determine reasons for the controls are not effective and apply the corresponding corrective action (Ax and Greve 2017).
The various steps for identifying and mitigating the issues of internal control of Bas limited are as follows:
Lack of Documentation:
The major weakness in financial management control in the BAS limited is a lack of adequate documentation. Irrespective of the records being in digital form or paper the financial management has to be able to reconstruct who initiated an action, such as a payment; who approved it; who modified it, if it was modified; who executed it; and what resulted from the action. Adequate documentation of activities establishes who was responsible for an action if an issue arises later on.
The Critical activities in the business such as issuing checks, have to be segregated into multiple tasks carried out by different employees. Having the same employee handle the whole process constitutes a weakness in internal financial controls (Dashtbayaz, Mohammadi and Mohammadi 2014). In general only one person issues the check, while two or more others sign it and another employee sends it out and enters it into the books. The process of separating the functions makes fraudulent activity more difficult.
This is the issue where there is lack of training to the employees. In the case that the IT staff only has the access to the IT department, this is due to the lack in training of the employees. In case the company of BAS limited has to prepare financial statements according to the authorised standards, the employees who are responsible for the work have to be familiar with the standards, company policies and internal controls (Aven 2016). Inadequate training of employees in key positions of responsibility constitutes a weakness in internal financial management.
Then comes the issue of deficiencies that can occur in the execution or design of the processes and procedures, but financial management has to target both possibilities with monitoring that detects discrepancies and issues that are corresponding reports. This may occur when a software is not tracking important documents or an employee forgets to issue required forms, employees in charge of verifying documentation have to issue a non-compliance report.
The issue of neglecting to track the approvals to make sure that employees are not exceeding their authorization levels is a key internal control function weakness. The Employees have an authorization to sign for spending limits and certain functions below which they can approve the expenditures. If an employee does not respect his limits, it represents a serious weakness in internal financial controls.
The Employees of the BAS limited compile the important variables within a business from multiple sources. At times, they may take physical inventory of products on hand but also calculate inventory from products received and products sold (Aven 2015). In case of lack of reconciliation between the two sources is a weakness in internal financial controls. A sound reconciliation identifies the differences between the two sources and finds explanations that result in improvements. A lack of reconciliation means the business does not account for differences
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