Internal Controls and Auditing Paper

Introduction

Preview is a company that pursues system and organization controls compliance; auditors should employ the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) Internal Control-Integrated Framework in testing them. COSO framework is used most commonly in implementing, designing, evaluating, and maintaining internal controls. Thus for Preview to successfully undertake an audit, they must meet the three internal control objectives, certify that all the five internal control components are in place and effectively functioning. In our case, Preview has an internal controls system in place, but they are not actively operating (Kirkpatrick, 2019). Here are the five components of COSO with Preview Company.

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Control Environment

Managers should develop policies and procedures that should guide the organization. Management should set standards in the organization so that every employee understands they are mandated to ensure your controls are adequate and objectives are being achieved (Kirkpatrick, 2019). In our scenario, Preview has corporate management with high integrity, which only intervenes when things go wrong. The internal controls are very inactive, both the board of directors and the internal audit committee. Weaknesses arise here where managers enjoy the discretion of doing anything they wish.

Risk Assessment

A company should have systems to assess risks to detect the activities that threaten their success (Jones, 2019). Preview lacks systems in place to closely monitor the activities of its employees. Although they have a performance-based payment system, they lack mechanisms investigating Harris’s behavior planning to manipulate inventory books. Harris is not even aware of the implications of conducting inventory and the retrospective impacts in the future. Harris is mainly concerned with his payment at the expense of the profitability of the whole company.

Information and Communication

The way management pass information to both internal and external users about their responsibilities ensures they receive feedback from their target group, who understand what they are enquiring about (Jones, 2019). In the Preview Company, management does not communicate and pass information about the employees’ code of conduct and responsibilities. That is why Harris wants to be unethical, which is entirely against its code of conduct. Communication is also lacking to coordinate the various departments and ensure a separation of duties in that managers in charge of inventories should be the one to prepare financial statements. It is a source of conflict of interest, where the manager is trying to manipulate books of account so that he continues to get his usual pay (Booker& Zhang, 2018).

Monitoring Activities

Management should oversee the entire company’s running and identify any red flags and any shortcomings and rectify them in the quickest time possible (Kirkpatrick, 2019). Previews directors and internal audit committees are proactive and do not oversee the various departments’ operations and see whether they are running efficiently. Because of the lack of monitoring, Harris has the freedom to manipulate the financial records in his favor. Management could have been aware that the sales have dropped and that no form of misstatement is bound to happen.

The Existing Control Activities

A company must an operational internal control system in place over some time (Jones, 2018). There are no forms of controls at Preview as the internal audit, which is supposed to be the ambassador of compliance.

Conclusion

In conclusion, an external auditor intending to engage with Preview should use an inspection test control tool to examine the documents, especially those from the inventory and procurement department, to detect any material misstatements. The auditor should also access the various documents about the approval of procurement and inspect them because it is an area of a high risk of manipulation.

References

Jones, A. (2019, September 26). Internal control: 5 key principles of COSO framework. IS Partners. https://www.ispartnersllc.com/blog/5-key-principles-of-coso-framework/

Kirkpatrick, J. (2019, June 28). 5 components of internal control. Kirkpatrick Price. https://kirkpatrickprice.com/video/5-components-internal-control/#:~:text=The%20five%20components%20of%20COSO%20%E2%80%93%20control%20environment%2C%20risk%20assessment%2C,each%20of%20these%20components%20includes

Zhang, X., & Booker, Q. (2018). Clarifying auditors’ responsibility for fraud: Commercial lenders’ perceptions of changes to the audit report. The CPA Journal, 88(3), 38-42. https://www.cpajournal.com/2018/04/02/clarifying-auditors-responsibility-fraud/