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Internal Control Of The System: B Ltd Company

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Question:

Discuss about the Accounting For Business Combinations for Financial Reporting.

 

Answer:

Introduction

Non-current assets are goods which cannot be readily converted into unrestricted cash within a period one financial year (Deegan, 2013). These assets are further classified as tangible and intangible goods. Intangible assets are held in a balance sheet for a period exceeding one financial year, they are non-physical, e.g. copy rights, and patent. Tangible goods are physical and may include land, buildings, and equipment (Malmi, and Brown, 2008).

The acquisition and disposal of these tangible non-current assets is a challenge to most companies, this requires the laying down of appropriate foundations, term and conditions for the acquisition and disposal. Every company places all its effects in these to ensure accountability and transparency in its management. B ltd Company has laid down the procedures for the acquisition and disposal of its tangible non-current assets

In this paper will discuss the strengths of the internal control for the acquisition and disposal of tangible non-current assets as laid by B ltd and propose the procedure for testing the internal control of its system. 

Strengths of internal control of the acquisition and disposal of tangible non-current assets of B Ltd.

A purchase requisition form is completed and approved by the departmental manager for acquisition of new assets. This enables the department to be accountable on what is needed by the company for the efficiency of its operations. Some companies have their decision making, on what is needed and irrelevant in the company placed at the top of its management. B Ltd. Will not purchase any irrelevant tangible assets since it has full involvement of its employees, it is at the department level where the decision for the approval of the acquisition of any commodity is made. The acquisition is approved in the consideration of the needs of the company at the specific time. This helps in streamlining the process of new purchasing asset by the company.

The purchase requisition form is checked by the purchasing officer for approval. Then, the Purchasing officer completes the purchase order. The purchase order indicates the agreed price, type and the quality of the commodity ordered. The consistency of information is maintained, the information contained in the purchase requisition form is approved. The quality of commodity and type needed is clarified that binds both the supplier and the company making the order. It helps for clarification of the information and correction of any errors that may have been unnoticed by the departmental manager when completing the assets requisition form.

The financial accountant approves acquisition of new assets over $5000. The board of Directors approves purchase of new assets over $10000. This helps in monitoring huge expenditures by the company. B Ltd cannot spend large amounts of finances without the approval of the top management. It keeps the company away from the risk of overspending and running short of its finances due to large expenditures without approval from the board of directors. The board of directors has the authority to approve or deny the request for expenditure. They are holds the accountability of large expenditures by the company. The financial accountant also holds the responsively of expenditures below 5000 US dollars. In case of any misuse of the company’s finances someone is held accountable since all the decisions made are certified by a certain individual.

 

A copy of the purchase order is sent to the supplier and to the head office. The buyer indicates the quality, type and the price of each commodity ordered. The purchase order controls the purchase of commodities from the external suppliers hence avoiding confusions within the company. Once this document has been agreed by the supplier, it becomes a binding contract between the supplier and the buyer. Important information is communicated to the supplier, it also facilitate for ease in the tracking of any outstanding order by both parties (Zhihua, 2007). Once the quality, quantity and price has been communicated to the supplier, and a copy of the purchase order has been received by the supplier, it is the responsibility of the supplying company to ensure that it meets the standards specified in the purchase order (Romney, and Steinbart, 2012).

The receiving clerk checks that the details of the asset purchased agree with those on the receiving report and the purchase order. The receiving clerk issues barcode numbers to the asset acquired. The barcode is attached to the asset and recorded on the receiving report and the supplier invoice. The receiving clerk has the responsibility to confirm the details in the order and identify any error that may have been unnoticed when writing the order. Issuing of number barcodes to the assets acquired helps in saving the time for tracking of the asset by providing more accurate efficient way to locate the assets (Dorf, and Bishop, 2011).

The departmental manager keys in the details of the assets acquired into the asset register using a copy of the purchase order, the requisition form, and the barcode. Since the department manager filled the purchase requisition form, he uses the previous information to note any changes. The assets register filled helps in identifying all the fixed assets of the company by identifying the date of acquisitions, price, and where the asset is located. Once the asset is entered in the asset register of the company, the company bares the responsibility of maintaining and managing the asset. Entering the asset in the assets register means that the asset must be valued within the systems of the business (Hargie, and Tourish, 2009).

An asset disposal form is completed by the departmental manager and a copy is sent to the financial accountant for approval. A copy of the approved asset disposal form is filed at head office and sent to the departmental manager for updating the asset register. The assets disposal form ensures that the asset to be disposed is handled correctly to facilitate transparency and accountability in the company. The decision to dispose the commodity is recorded in the disposal form and all the reason for the disposal is documented. This helps in preventing the disposal of assets in use by the company by irresponsible managers, and also guides the company in doing away with the assets that are not being used by the company (Furnham, and Gunter, 2015). The sending of the copy of assets disposal form to the financial manager for approval before a commodity is disposed is required for the auditing purpose. Once a commodity is disposed the assets register should be updated. This helps in the preparation of the financial statement.

The asset register is reconciled to the general ledger by the departmental manager monthly. The reconciliation of the register to the general ledger helps in the preparation of the financial statement because it contains complete financial transactions records related to the company assets and other important information. It has to be done regularly to ensure that the company’s records are updated and prevent the back loading of unrecorded information. This make the work of preparing the financial stamen easier since all the information required is recorded (Porter, 2008).

Depreciation is calculated monthly by the rate input by the departmental manager. Depreciation is the reduction of the recorded value of the fixed assets that helps to guide the company in deciding when the disposal or replacement of an asset is required (Buckley, and Caple, 2009). Depreciation calculation will help the B Ltd in accountability.

Recommended procedures for testing the internal control of the system

Internal control can be tested by the following seven step procedure.

  • Separation of duties

This is the breaking down of responsibilities for auditing, depositing, bookkeeping and reporting and assigning it to different personals.

  • Access control

The use of electronic access logs and passwords for the system to keep unauthorized persons out of the system

  • Physical audit

This is verification of the existence of an asset. It is done by hand count and can reveal hidden disparities in the system.

  • Documentation

This is normalizing documents used in accounting purposes.

  • Trial balanced

This is the use of a double entry account to ensure that the books of account are always balanced.

  • Reconciliation

It helps in ensuring that the balances held by other entities like bank is similar to the one in the accounting system.

  • Approval authority

This is giving responsibilities to authorize certain transactions to specific managers.

Conclusion

B Ltd has a well-structured system for the acquisition and disposal of tangible non-current assets. The system ensures that all the decisions made in the organization are based on sound consideration aimed to better the company. Accountability and transparency is also promoted by the system. Transactions involving large amount of money has to be approved by the board of management. There is no asset that can be disposed without a valid reason and consent of responsible personnel.

The internal control of a system can be tested by the seven step procedure above. This ensures that the organization operations run effectively and efficiently.

 

References

Buckley, R. and Caple, J., 2009. The theory and practice of training. Kogan Page Publishers.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Dorf, R.C. and Bishop, R.H., 2011. Modern control systems. Pearson.

Furnham, A. and Gunter, B., 2015. Corporate Assessment (Routledge Revivals): Auditing a Company's Personality. Routledge.

Hargie, O. and Tourish, D. eds., 2009. Auditing organizational communication: A handbook of research, theory and practice. Routledge.

Malmi, T. and Brown, D.A., 2008. Management control systems as a package—Opportunities, challenges and research directions. Management accounting research, 19(4), pp.287-300.

Porter, M.E., 2008. Competitive advantage: Creating and sustaining superior performance. Simon and Schuster.

Romney, M.B. and Steinbart, P.J., 2012. Accounting information systems. Boston: Pearson.

Zhihua, X., 2007. Internal Control, Corporation Governance and Risk Management: Relationship and Integration [J]. Accounting Research, 10(007).

OR

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