Assessing Internal Control Risks

This assignment focuses on assessing internal control risks within a company's cash receipts system. It outlines various assessment techniques such as inquiries with management and personnel, observation of the process, reviewing documents like mail registers and sales representative records, analyzing accounts receivable, and reconciling bank accounts with cash receipts reports. The aim is to identify potential control weaknesses and provide recommendations for improvement.

AUDITING

Auditing
Case Study -1
(a) Internal control is the policy defined in an organization through which the organization
can achieve its objectives most efficiently and comply with the regulations and defined
policies. The strengths in the internal controls of Acid Pty Ltd. are :
i. There are various terminals and checks pre-determined at every level of the
business cycle such as at the ordering department, sales department, dispatch
office, stores department and the delivery department. Such terminals and check
are very important for the business process to accomplish effectively (Elder et. al,
2010).
ii. The orders are taken on a selective basis as the orders receive pass through the
computer edit checks and those orders which are not up to the mark are rejected
by the system. This ensures that only those orders are taken which can be fulfilled
by the company with full accuracy (Vause, 2009). It helps in ensuring a better
activity and enables the company to receive orders. Moreover, the orders that are
fulfilled are undertaken ensuring that the business is not affected.
The weaknesses in the internal control of Acid Pty Ltd. are:
i. Although the order checking and accepting system is good, it may result in fewer
orders and thus fewer sales as the orders would have been checked through some
officials and if any adjustments or modifications could be possible for procuring
orders, it would help in increasing the sales (Church et. al, 2008). Therefore, the
process of evaluation will lead to fewer sales.
ii. The company takes the orders without checking the inventory levels. After taking
the orders and going through different departments, the final orders are forwarded
to the warehouse department where it is finally assessed by the store person and if
the ordered goods are out of stock, the partial orders of goods in stock are
forwarded to the dispatch department (Geoffrey et.al, 2016). Hence, the process
of assessment is weak and will not help the company to enhance its sales.
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Auditing
Moreover, the process is slow and will not help the company to attain a better
prospect.
iii. Lack of oversight and review is there by the owners towards the whole business
cycle as there are different flaws in all departments and these would be identified
only when the owners or the top level executives keep a watch on all the activities
and processes of the business cycle (Church et. al, 2008).
iv. The long business cycle is a very time-consuming process.
v. The accounts receivables are updated in the master file on a daily basis but the
same is not reconciled with the delivery receipts.
(b) The implications of weaknesses identified are as under :
i. As there are no reviewing of the orders received from the customers apart from
the computerized system, there is a possibility and might have been many cases
where the order criteria may not have been found correct by computer system due
to nonfulfillment of one or two criteria or may be due to any clerical error, but the
same could be rectified or amended by the department head (Matthew, 2015). Due
to complete dependency on computer systems for procurement of purchase
orders, the company may lose many purchase orders in future which may further
reduce the sales of the company and ultimately reduce the profitability.
ii. The company takes the orders without checking the inventory levels. After taking
the orders and going through different departments, the final orders are forwarded
to the warehouse department where it is finally assessed by the store person and if
the ordered goods are out of stock, the partial orders of goods in stock are
forwarded to the dispatch department. This may create great losses for the
company in the form of –
- Fall in the reputation of the company as the customers who have placed their
orders will not get those goods delivered which are not in stock with the
company. As the company had accepted the orders, it should fulfill the same.
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Auditing
When these are not fulfilled, the reputation of the company in the eyes of the
company will start falling considerably.
- The company may incur losses as it might have to pay compensation to its
customers for partial delivery of goods. Once a company accepts the orders, it
becomes its obligation to fulfill the orders in time and deliver the complete
orders. In case bulk orders are taken from big companies and orders are not
completely delivered, the company may have to pay compensation to the
ordering companies.
- Lack of oversight and review is there by the owners towards the whole
business cycle as there are different flaws in all departments and these would
be identified only when the owners or the top level executives keep a watch
on all the activities and processes of the business cycle. If the owners will not
keep a watch and review on the business process, it may lead to various frauds
and manipulations in the accounts, cash, and inventories by the managers or
low-level workers of different departments (Johnstone et. al, 2014).
- The whole business process is a very time-consuming process which may lead
to more time taking in the delivery of orders. The time period between
procurement of order and dispatch and delivery of orders increases due to
such lengthy processes. The company should instead develop a shorter cycle
to save time and money (Wood, 2011).
- The accounts receivable are not tallied and verified on a daily basis by the
company with the daily delivery vouchers. This may lead to the incorrect
calculation of amounts receivable from customers.
(c) Control Risk Assessment for company’s sales system :
Control risk assessment is a technique through which the risks are assessed so that
the objectives for which internal controls have been implemented can be achieved
(Gay & Simnet, 2015).
In the given case the assessment procedure of risks shall be set up department
wise. If the sales system is taken here, then the risk assessment may be done using
the following methods/ techniques:
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Auditing
- By inquiring about the sales system and its process from the management
team and the other designated personnel of sales team
- By going through the audit report of the previous year and noting the points in
the report with regard to the internal controls.
- By observing the whole process followed by the sales system.
The company and the management need to do in-depth study about the business process
cycle and verify the reports presented by each department with regard to their follow-ups
and actions taken in case of any problem has been assessed.
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Auditing
Case Study- 2
(a) Internal control is the policy defined in an organization through which the organization
can achieve its objectives most efficiently and comply with the regulations and defined
policies (Gay & Simnet, 2015). The strengths in the internal controls of Cannon Pty Ltd.
are :
i. The cheques from the customers have received through email also. This helps in
keeping a track of the cheques received from the particular customers. Moreover,
this process inconvenient in nature as it helps in providing a better grasp of the
records.
ii. All the cheques are crosses to ensure that the payments are going into the bank
account of the company only. It is a better prospect as it leads to keeping a track.
iii. Daily cash receipt reports are printed in the company. This enables the company
to have a better management of the cash receipts.
The weaknesses in the internal control of Cannon Pty Ltd. are:
i. The cheques are crossed after they are received in the sales order department by
the credit control clerk. As the cheques are received through email and sales
representatives, there are very high chances that the cheques may be manipulated
and fraud may be committed because before a cheque is crossed, it remains a
bearer cheque.
ii. The details of cheques received are entered in the terminal at a later level. It
should be done as soon as the cheques are received.
iii. There is no check on the aging of debtors. Where the information regarding
remittance advice is not adequate or is not attached with the cheques, the credit
control clerk allocates the receipts to the oldest balance first.
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Auditing
iv. There is no proper segregation of duties as the credit control clerk is only
responsible for collecting the cheques and crossing them, entering details of the
cheques in terminal and aging of debtors.
v. The cash receipts data and accounts receivable master file is prepared daily with
the cheque details only before the cheques have been credited to the bank
accounts. It may be possible that some cheques may get bounced but the accounts
receivables have already been shown as cash received with the receipt of cheques
(Carcello, 2012).
(b) The implications of weaknesses identified are as under :
i. As the cheques are crossed after they are received in the sales order department by
the credit control clerk, there are very high chances that the cheques may be
manipulated and fraud may be committed because before a cheque is crossed, it
remains a bearer cheque and the sales representatives and the person who receives
the email may take full advantage of this limitation in the internal control
(Carcello, 2012).
ii. The details of cheques received are entered in the terminal at a later level. It
should be done as soon as the cheques are received. Once an instantaneous
recording of the cheque is done it leads to better transparency and elimination of
any fraudulent activity. This delay in recording of cheques may lead to
manipulation of cheques by the person responsible for collecting them (Heeler,
2009). By keeping a track of the cheques received at the initial level only, this
problem can be avoided.
iii. There is no check on the aging of debtors, and further, where the full information
is not received along with the cheques, the allocation process gets disturbed. Also,
there is no clarification sought immediately from such debtors.
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Auditing
iv. As there is no segregation of duties and numerous duties have been handed over
to one person only, there are major chances of mistakes and errors due to
overburdening of the person which is the credit control clerk. Hence, the company
should appoint one or two more persons so that the duties can be segregated
(Black, 2010).
v. The cash receipts data and accounts receivable master file is prepared daily before
the cheques have been credited to the bank accounts. It may be possible that some
cheques may get bounced but the accounts receivables have already been shown
as cash received with the receipt of cheques (Reding et. al, 2015). The company
should record the amounts received only when the cheques are encased or
credited to the bank accounts of the company.
(c ) As per Roach (2015) assessment of the internal controls shall be done using the following
technique:
i. By enquiring about the cash receipts system and its process from the management
team and the other designated personnel of cash receipts management team.
ii. By observing the whole process followed by the cash receipts management team.
iii. By checking the mails register and also the registers maintained and signed by the
sales representatives.
iv. By accessing the accounts receivable registers. This will provide a better view of the
accounts receivable and hence, the appropriate decision can be taken regarding the
funds.
v. By reconciling the bank accounts with the cash receipts reports and bank deposit
slips. The reconciliation will help in providing a better response and any differences
can be easily negated.
All these assessment techniques will help the company in finding out the internal control
risks and also help in advising the management on how to remove the said weaknesses in the
internal controls.
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Auditing
References
Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and
Crises, Working paper, University of Missouri-Kansas City.
Carcello, J 2012, ‘What do investors want from the standard audit report?’, CPA Journal vol.82,
no. 1, pp. 7-12
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