Auditing-Internal Control - Essay Sample

Introduction

In auditing and accounting, internal control is defined as the process of assuring of an organization's goals in operational efficiency and effectiveness, compliance with laws, regulations and set policies, and reliable financial reporting. In its broad concept, internal controls include everything that controls risks to a given organization. It is worth noting that internal control is a means by which resources of an organization are monitored, directed, and measured. Therefore, it should be understood that this process plays an essential role in helping to detect and prevent any fraud hence protecting the resources of an organization, both intangible and physical resources (Graham, 2015). The objectives of the internal control system relating to the reliability of financial reporting, compliance with the set laws and regulations, achievement of strategic or operational goals of the organization as well as timely feedback. Notably, at the transaction level, internal controls involve actions taken to achieve specific goals. For example, ways of ensuring that payments of the organization to third parties are for genuine and valid services rendered.

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Revenue cycle is a repeating set of company activities and related information processing operations associated with providing goods and services to customers and collecting cash for payment for those sales made to them. The primary objective of the revenue cycle is to provide the right products required by the customers at the right place and at the appropriate time for the right price. Therefore, in a bid to accomplish that aim, the business management and key decision makers must come up with crucial decisions (Graham, 2015). These decisions include; what extent can products be customized to individual customers' needs and desires? What are the maximum prices for goods and services? Are there credit terms to be offered? How much credit should be offered to individual creditors? How should products and services be delivered to customers? How should payments be processed to help maximize cash flow?

Considering the COSO methodology of an effective system of internal control that features five components can support the achievement of such objectives (Graham, 2015). The components are; there should be a proper control environment, adequate risk assessment mechanisms, activities of the organization should be controlled, unobstructed flow of information and communication in all directions, and finally monitoring of the internal control system by regularly checking its progress.

In considering the case of Science is Us company, it cannot be denied that some risks are observed in some procedures in its internal control system. In the case of order enter, there should be a clear procedure where before taking the order of the customer, approving customer credit, the company should first check if the inventory is available before responding to such customer inquiries. This was not the case with the company (Graham, 2015). Another risk that the company did not consider is under credit policies. It is true that the company does not maintain a formal policy or a list of the existing credit limit for customers. This is against the COSO methodology which recommends that there should be proper rules and regulations regarding all business transactions to make it more formal although the company had few customers.

Another risk is with the system of invoicing that the company is using. It is true that different methods of invoicing could be used, but some are very tedious. For example, it becomes tiresome to invoice other customers electronically while others are invoiced through hard copies. The fact that the company has a low number of customers should allow it to be major in a single integrated process in invoicing its customers (Graham, 2015). For example, in a bid to save time, the company could invoice its customers electronically to avoid the loss of hard copies as well as save the time taken to record the orders in the system.

As generally accepted, revenues should be recognized at the shipping point. However, it can be risky for the company to use its unwritten policy to guide the revenue recognition processes. This can involve several risks like material misstatement due to fraud among others. It is appropriate that revenues are recorded at the point of shipment because it is agreed with the customer that the ownership of the goods changes hands when they are shipped. This can save the company from unnecessary losses arising in the process of shipping the products.

Considering account receivables, the fact that this is a small company dealing with a small number of customers should make its activities checked almost in a monthly period. The AR reports should always be electronically generated to help save time. The fact that the general accountant resolves items on the report more significant than 91 days past due date is also not backed by any policy (Graham, 2015). This is a clear risk because some law or regulation should support all the business activities according to the COSO internal control framework. The last risk assessed was in the application of customer payments which the business is carrying out manually. This can be a tiresome process, and the fact that the company is not comparing batch summary value because of low volumes can lead to significant risk.

In summarizing significant opportunities for improvement, it is first to note that from what is observed in the case, real-time order entry helps to detect errors like missing data, as the order is being entered, and when it is appropriate to correct such errors (Graham, 2015). It is essential for the company to improve its credit approval decisions so that it is made when the customer places the order so that the credit manager is notified through email and can therefore immediately make a decision. This will be important to the company as it will save time in transactions as well as working with established policies. Inventory controls should also be timely and accurate. This should not be kept manually but electronically to allow for faster verification. It will also enable sales order entry staff to provide customers with accurate information about expected delivery dates.

Recommendations for improvement in the company are that the company should better plan its activities to help in minimizing the time that is taken in filling customer orders. This can electronically be achieved through the integration of all the processes. Also, the use of open invoice by the company is quite complicated as added information is required about the status of each invoice for every customer (Graham, 2015). Through the use of electronic means of comparing data, this process can easily be achieved hence saving time. Notably, the use of electronic means of data exchange will help save time and increase efficiency in the company. This can assist in quicker processing of invoices and cash receipts. Lastly, there will be timelier reports and performance measures thereby promoting the ability of management to monitor and improve the effectiveness and efficiency of the company services.

Another recommendation that I would put forward to be considered by Science is Us company is that it should review its control activities by setting and following sound policies and regulations based on the rules, risk factors among others. This will ensure that there are appropriate preventive measures and responses, especially in its invoice and revenue recognition procedures. Despite the regularly scheduled audits and reports, it is essential for the company to continually monitor internal control especially in the areas of invoicing and revenue recognition.

Conclusion

In conclusion, internal controls can be improved and evaluated to make operations of the company run more smoothly and efficiently. Automating the above-mentioned control systems that are manual can help to save costs and improve processing of various transactions (Graham, 2015). Internal control should therefore not be thought of by company executives as just a way of reducing fraud and adhering to laws and regulations because a critical opportunity may be missed. From the observations, internal control can be used to systematically improve operations of the company, most specifically concerning effectiveness and efficiency.

References

Graham, L. (2015). Internal control audit and compliance: documentation and testing under the new COSO framework. John Wiley & Sons.