Internal Control Weaknesses, Risks and Control Measures

This report analyzes the internal control weaknesses in Chipps Company and provides recommendations for control measures to mitigate these weaknesses.

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Running Head: ACCOUNTING INFORMATION SYSTEMS
Accounting information systems
Student’s name
Affiliate institution
Date

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ACCOUNTING INFORMATION SYSTEMS
To: Oriental Traders
From: System Analyst
Topic: The Acquisition To Payment System Of Oriental Traders
Date: 10th May 2019

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ACCOUNTING INFORMATION SYSTEMS
Part A
Executive summary
The purpose of this report was to analyze and develop a word flowchart that indicates the
type of purchasing process in Oriental Traders. The report also aimed at the identification of
internal control weakness in the expenditure of the company. The report also aimed at providing
the risks which are associated with the related weakness in Oriental Traders Company. The
report concludes by giving a recommendation of the available control to mitigate the indentified
Oriental Traders internal control weaknesses. This report also aims at providing a clear
illustrated purchase process of Oriental Traders.

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ACCOUNTING INFORMATION SYSTEMS
Document flowchart of purchase process in Oriental Traders
SUPPLIERS
A (Purchase requisitions)
(purchase order)
B (approved PO)
PURCHASING puchasing manager supplier
DEPT
C (PO) (confirmation)
Notice
D (tax invoice)
(acceptance notice) Accounts payable
(Payment request)
Accounting department
(Preparation of EFT file for payment purposes)
(Supply of goods to the respective departments)
NOTE: all the processes are automated through the inventory management system

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ACCOUNTING INFORMATION SYSTEMS
To: Chipps
From: Chipps Accountant
Topic: Internal Control Weaknesses, Risks And Control Measures
Date: 10th May 2019

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ACCOUNTING INFORMATION SYSTEMS
Part B
Executive summary
This report aims at the examination of internal control weaknesses which are found in Chipps
Company. Te report also aims at the assessment of all the risks which are associated with the various
indentified internal control weaknesses. Moreover, the report aims at the provision f the available
control proce4dures which can be followed in order to mitigate the indentified in Chipps. The report
finally concludes with a recommendation for Chipps Company.

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ACCOUNTING INFORMATION SYSTEMS
Table of Contents
Part A...........................................................................................................................................................4
Executive summary..................................................................................................................................4
Document flowchart of purchase process in Oriental Traders................................................................5
Part B...........................................................................................................................................................6
Executive summary..................................................................................................................................6
1.0 Internal control weakness......................................................................................................................8
1.2 Impact of the weakness..........................................................................................................................8
1.3 Control to mitigate the weakness...........................................................................................................8
1.1 Approval process...............................................................................................................................8
1.2 communication procedure................................................................................................................8
1.3 Poor recordkeeping for....................................................................................................................10
intake, uses, requests, projected needs................................................................................................10
1.4 No segregation in purchasing receiving processes..........................................................................11
1.5 Escalating consumption pattern not detected nor reviewed...........................................................12
1.2.1 Impact of approval process internal control weakness..............................................................5
1.2.1 Impact of poor communication internal control weakness........................................................5
1.3.1 risks of poor record...................................................................................................................10
keeping..............................................................................................................................................10
1.4.1 Internal confusion.....................................................................................................................11
1.5.1 Lack of clear records.................................................................................................................12
1.2.2 Approval process internal control weakness control..................................................................5
1.2.2 mitigation of poor communication procedure as.......................................................................5
1.2.3 Formation of inspection and receiving committee.....................................................................9
1.3.2 control of poor record keeping.................................................................................................10
1.4.2 Introduction of a receiving department and officers................................................................11
1.5.2 Frequent reporting...................................................................................................................12
Conclusion.................................................................................................................................................13
others.......................................................................................................................................................13
Recommendations.....................................................................................................................................13

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ACCOUNTING INFORMATION SYSTEMS
References.............................................................................................................................................15

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1.0 Internal control weakness 1.2 Impact of the weakness 1.3 Control to mitigate the weakness
1.1 Approval process
Once a purchase requisition is
prepared by a department head and
sent to the purchasing department, the
purchasing clerk is supposed to
prepare a purchase order and send to
the senior procurement/ purchasing
manager for approval. Once the
purchasing manager receives the
purchase order then he/she selects a
supplier who meets the required
standards and sends an LPO local
purchase order.
1.2 communication procedure
in accounting and also in
procurement verbal
1.2.1 Impact of approval
process internal control
weakness
The impact of this
weakness is that it can result
in unnecessary expenditures
by the user departments,
moreover lack of a good and
well-defined cycle where
every process is followed to
the latter may lead to fraud , as
the department heads may take
advantage of the lack of senior
purchasing manager approval
and partner with the supplier
to pocket money which may
be paid for goods not supplied
(Zakaria Nawawi & Salin,
2016).
1.2.1 Impact of poor
communication internal
control weakness
The impact of this
Weakness is that the
1.2.2 Approval process internal
control weakness control
The control of this weakness would
Be, to introduce a well-defined
process and monitored the
purchasing cycle. This can be done
by fully integrating the ERP
software system in all the processes
included in purchasing (Badara &
Saidin, 2013). A purchase
requisition should be sent via the
system approved in the system; a
purchase order also should be
prepared in the system and sent for
approval to the manager.
1.2.2 mitigation of poor
communication procedure as
an internal control weakness

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communication is not a
professional way to conduct a
purchase. Chipps has not embraced
a professional way of conducting
purchases as the purchasing clerk
uses a phone to discuss a price
quote. In accounting, the price
quote should be sent as a request
for quotation to several selected
suppliers who have been listed for
the product and service required.
Once the suppliers through a
segment in the ERP system replies
to that request an analysis should
be conducted and the best supplier
and not the lowest bidder should
be sent a local purchase order
requesting the supplier to make
deliveries. Moreover, verbal
communication in Chipps from the
user department to the purchasing
clerk noticing them that the goods
had been received is also not a
company can suffer from
excess expenditure and
payment of non-supplied
goods. Hence may end up
suffering losses.
The control for this internal
control weakness would be, the
installation and fully embracement
of the ERP system to automate
every step from requisition to
payment.
1.2.3 Formation of inspection and
receiving committee
The second control would be the
formation of inspection and
receiving committee which will be
used to countercheck the goods
received against the local purchase
order which was given out (Badara
& Saidin, 2013).

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ACCOUNTING INFORMATION SYSTEMS
professional way to report as it can
attract greediness to corrupt if
receiving inspection does not
involve individuals from several
departments to act as witnesses.
1.3 Poor recordkeeping for
intake, uses, requests,
projected needs
This weakness can be easily be traced
from the purchasing process of chipps,
a purchasing clerk uses a phone call to
request for a quotation. In an
organized company the request for a
quotation should be automated and
where a previous order was given the
past price quotation has used the
inquiry by the clerk shows that the
company lacks a well-defined
recordkeeping rule. More so, the
verbal notification of goods received
indicates that the company did not
make use of goods received a note and
other important records such as issue
notice and goods returned notice.
1.3.1 risks of poor record
keeping
The impact of this
The departmental heads can
make use of the verbal
communication to lie to the
purchasing clerk that goods
have been received while In
reality nothing has been
supplied.
Lack of future reference
Another risk is that due
to lack of proper
documentation fraud cases are
not easy to be traced or even
be audited.
Purchasing fraud
Finally, the company will
incur expenses for goods and
services which were not
1.3.2 control of poor record keeping
The control to this will be the
implication of an online system for
record keeping. This can be achieved
through installation of a database
software which will be used as the
company achieve where ever
documents will be backed up for easy
retrieval during inspection or audit
purposes (Nicolăescu, 2013).

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1.4 No segregation in
purchasing receiving processes
This can be easily been traced in
Chippy as the requester department is
the receiver and hence the company
lacked a very critical department
which receives and issues goods to the
department upon need. The store is a
very critical department which has to
be integrated in each business for
proper segregation of purchasing and
receiving activities. In cases where
their is a store verbal communication
is killed and goods received notes as
well as well documented goods issue
note are prepared to ensure efficiency
in the operation of the company.
supplied hence incurring loss
through an increase in the
operational cost as compared
to the revenue generated.
1.4.1 Internal confusion
Lack of a well segregated
activities will lead to
confusion whereby even the
limitation of products use is
not regulated. Hence the
company will be suffering
from wasteful use or
unnecessary disposals which
have not matured (Dorotinsky
& Floyd, 2014). As it is
always known departments
will always be requesting for
more and more every day but
if a regulatory department
exists cases of fraud will
decrease hence saving the
companies expenses.
1.4.2 Introduction of a receiving
department and officers
The control to this weakness will
be the introduction of a receiving
officer who will be mandated to control
the request and usage of goods in the
company.
Improved recording
Another remedy would be proper
recording of department expenditure
monthly reporting.

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ACCOUNTING INFORMATION SYSTEMS
1.5 Escalating consumption
pattern not detected nor
reviewed
This evident in chippy as the
purchasing clerk only confirms
whether the requisition have been
produced by the heads of the
departments. The law requires that
a clear need to be defined ion why
the department require the service
or the good and also the urgency
and finally how often is the need
ordered by the department.
Moreover by making a phone call
to inquire on price quotation , the
purchasing clerk is representing
the greater picture of the company
on how they are not able to keep a
track record of the expenses of
each department.
1.5.1 Lack of clear records
The risk to this weakness
is corruption and other fraud
practices as there exists no
track of record for the
consumption and the limit of a
department requisitions
(Dorotinsky & Floyd, 2014).
Lack of a clear estimate
The risk of escalated
records of consumption
pattern of a department is very
risky as the company cannot
be able to estimates as well as
regulate the base consumption
of a department (Cheng,
Dhaliwal & Zhang, 2013).
This will lead to increased
overall consumption as
compared to the produce.
1.5.2 Frequent reporting
The remedy to this weakness will
be to request a monthly
consumption reporting or quarterly
expenditure reporting of every
department and conducting an
average of every department to
prevent excess supply or less
supply of goods (Zakaria, K. M.,
Nawawi & Salin, 2016).

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Conclusion
In conclusion, Chippy Company is experiencing a problem and also experiencing several internal
control weaknesses. The weakness includes the lack of proper communication channel, poor
documentation, and planning among others. The above-identified weaknesses are associated with
several risks which might finally lead to the collapse of the company or leading to the loss-making of the
company. Such risks associated with these weaknesses include; loss, making, lack of a future reference
source among others.
Recommendations
This report recommends several controls which are aimed to mitigate the identified internal
control weakness. Among the recommendation provided by the report are; the company should
introduce frequent reporting where the company would be able to reduce the internal control
weakness. Another recommendation is the introduction of a receiving department as well as a receiving
officer through this the company will be able to reduce the weakness which may result in excessive
expenditures by departments. Finally, this report recommends that Chipps company should introduce
and embrace a fully automated system which will help in reducing paperwork as well as an integrity
based flow of the purchase process until the payment of the goods supplied.

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References
Badara, M. A. S., & Saidin, S. Z. (2013). Impact of the effective internal control system on the
internal audit effectiveness at local government level. Journal of Social and Development
Sciences, 4(1), 16-23.
Cheng, M., Dhaliwal, D., & Zhang, Y. (2013). Does investment efficiency improve after the
disclosure of material weaknesses in internal control over financial reporting?. Journal of
Accounting and Economics, 56(1), 1-18.
Dorotinsky, B., & Floyd, R. (2014). Public expenditure accountability in Africa: Progress,
lessons and challenges. Building State Capacity in Africa, 179.
Nicolăescu, E. (2013). Understanding risk factors for weaknesses in internal controls over
financial reporting. Journal of Self-Governance and Management Economics, 1(3), 38-
43.
Zakaria, K. M., Nawawi, A., & Salin, A. S. A. P. (2016). Internal controls and fraud–empirical
evidence from oil and gas company. Journal of Financial crime, 23(4), 1154-1168.