Breaches of Internal Control and Modification to Procedures

This report discusses the breaches of internal control in a company and suggests modifications to procedures to address these breaches. It also highlights the additional requirements for ASX listing on the stock exchange.

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Running head: ACCOUNTING
Accounting
Name of the Student
Name of the University
Author’s Note

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Project 1
Introduction
Internal control refers to the processes within an organization in order to assure its
objectives in operational effectiveness as well as efficiency, dependable financial reporting
and compliance with the required regulations, policies and procedures (Pizzini, Lin &
Ziegenfuss, 2014). Loopholes or breaches in the internal control can lead to major financial
fraud within the organizations and thus, the companies are needed to employ effective
internal control policies within the organizations. This report aims at the identification of
breaches within How to do it and developing appropriate modified procedures for these
breaches.
Breaches of Internal Control
It can be seen from the provided case scenario of How to do it that there are three
areas where breaches of internal control can be seen and these are discussed below:
1. According to the provided scenario, the audit partner of the company has been the
audit partner of the company from its inception and thus, the company has considered
them as the part of their team. The auditors also attend the Christmas party of the
company every year. According to APES 110, it is needed for the auditors to maintain
indepdence of mind and independence in appearance (apesb.org.au, 2019). According
to the principles of audit independence, the auditors are needed to avoid the facts and
circumstances that are so significant that it can compromise the auditor’s integrity,
objectivity and professional scepticism. This situation can lead to self-interest threat
of audit independence where the auditors have financial or non-financial interest in
the audit client (Tepalagul & Lin, 2015). It can be seen in the provided scenario that a
member of the audit team has informed the general manager about the issue related to

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low profitability in spite of the presence of increase in turnover. In spite of the
significance of this matter, this issue was not reported in the audit report. It indicates
that the auditor might have compromised the audit responsibility in the presence of
personal interest in the audit client. Thus, this needs to be considered as a key internal
control breach.
2. It can be seen from the provided case of How to do it that the section manager is
responsible for major purchases and he made payment of these invoices to a company
owned by himself and his wife. In addition, the made an excess payment of $500,000.
This situation indicates towards the lack of authorization of transaction and review
which a major internal control breach in the company (Daniela & Attila, 2013). There
is not any employee or person responsible for reviewing the fact that whether
payments are made in accordance with the purchase and whether all the purchases are
made to the same company or not. Lack of review related to purchase has led to the
occurrence of this fraud in the payment of purchase invoice. For this reason, this is a
major breach of internal control (Daniela & Attila, 2013).
3. According to the providing case study, the section manager has numerous
responsibilities like sign off the completed work, receive of supply and payment
authorization. In addition, his wife has the responsibility of issuing cheque and both
of them are signatories to the cheque account (Choi et al., 2013). This is a major
internal control breach due to the fact that there is not enough segregation of duties
that has significant contribution toward the occurrence of fraud. Few employees or the
same employee with many roles has the potential to lead to major financial frauds
within the organization. The same aspect can be seen in case of How to do it. For this
reason, this is a major breach of the company’s internal control (Choi et al., 2013).

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Modification to Procedures
It is needed for the management of the firm to undertake certain modification in the
procedures against these breaches in internal control and these are discussed below:
1. It is needed for the management of the firm to ensure the fact that they maintain a
distance from their external auditor in order to ensure the appropriate outcome of the
audit procedure (Church et al., 2014). They need to understand the fact that the
external auditors cannot be the part of their team since it is against the fundamental
ethical principles of the audit profession and thus, the auditors also needed to maintain
a distance from the audit clients whose financial accounts they are supposed to audit.
Hence, it is needed to the management of the firm to ensure that the auditors do not
come to the Christmas parties (Church et al., 2014).
2. In order to address the second breach of internal control, the management of How to
do it must introduce the appropriate level of authority for eliminating the risk of
impropriate spending (Graham, 2015). More specifically, it is needed to introduce a
person in the purchase and payment system who will be authorized to check and
verify the fact that whether payments have been made as per the purchase invoices
and to which companies they are paid. This will lead to the elimination of the chance
of excess payment. This will also highlight any inappropriateness in the purchase
process such as purchase to the same company and others (Graham, 2015).
3. The key procedure to manage the last breach of internal control is to ensure proper
segregation of duties within the organization where the management of How to do it
needs to ensure that the same employee does not have many roles. This process will
ensure that each employee has separate job responsibilities which is needed to avoid
fraud (Rubino & Vitolla, 2014). In case of How to do it, the management needs to
ensure that the section manager does not have the responsibilities of work completion,

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receive order and payment authorization since these responsibilities need to be
segregated to more than one employee. In addition, the management of How to do it
also needs to make sure that there are separate employees for signing cheque and
signatories. In case these processes are implemented, the chances for financial frauds
will be minimized (Rubino & Vitolla, 2014).
Conclusion
The above discussion indicates towards the significance of internal control within the
organization for the purpose of elimination of financial frauds. As per the above discussion,
the major breaches in the internal control of How to do it can be seen in the areas of client-
auditor relation, lack of appropriate authorization as well as review and the segregation of
duties. The appropriate internal control measures that needs to be undertakes are discussed
above which would play a crucial role in strengthening the internal control of the company.
These measures are proper segregation of duties, presence of appropriate authorization and
others.

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Activity 2
Introduction
There are certain additional requirements that the Boards of the firms needs to satisfy
for ASX listing on the stock exchange. This report aims at discussing these additional
requirements.
Additional Requirements
 A firm must have the satisfactory spread of shareholders and thus, must satisfy one of
the below:
- 400 shareholders where each holding shares with a minimum value of AUS$2,000.
- 350 shareholders where each holding shares with a minimum value of AUS$2,000
and parties unconnected to the firm and its directors must hold a minimum of 25% of
the firm’s shares.
- 300 shareholders where each holding shares with a minimum value of AUS$2,000
and parties unconnected to the firm and its directors must hold 50% or more of the
firm’s shares (Huu Cuong, Gallery & Artiach, 2013).
 After that, the entity is needed to issue a prospectus for the purpose of ASX listing
and this needs to be lodged with the Australian Securities and Investment
Commission (ASIC).
 The sale price or issue price of the securities for which the firm pursues quotation
should be at least AUS$0.20 at the time of admission (McGrath, 2013).
 It is needed for the entity for providing a statement to the ASX revealing the degree to
which they will comply with the detailed corporate governance recommendations
provided by the ASX Corporate Governance Council.

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 The obligation the firms is to admit to the official list that the constitution of the firm
adheres to the needed compulsory requirement provided by the ASX Listing Rules
(McGrath, 2013).
 The companies are needed to comply with the ASX Listing Rules related to the
classification of certain securities as the restricted securities which are subject to
restriction and escrow (Chew & Scott, 2013).
 It is required for the directors of the public listed companies to disclose different
interests that includes any relevant interest they hold in the company’s securities and
contracts which entitle the directors for certain benefits (Wilkinson, 2014).
 It is needed for the entities to comply with the fees and timelines associated with the
listing process apart from the costs associated with engaging advisors and others
(Wilkinson, 2014).
Conclusion
As per the above discussion, it is the priority to the managements of the firms to
ensure complying with the above-discussed additional requirements for ensuring appropriate
listing in ASX.

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References
Apesb.org.au. (2019). APES 110 Code of Ethics for Professional Accountants. Retrieved 12
June 2019, from
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