Internal Controls

University Degree Business and Administrative studies

Internal Controls

Team B

University of Phoenix

Accounting for Managerial Decision Making ACC 539

George Peterson

December 18, 2004

Internal Controls

Internal control is broadly defined as a process, affected by an entity's board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in 1) effectiveness and efficiency of operations, 2) reliability of financial reporting, and 3) compliance with applicable laws and regulations. Controls can be preventive or detective. An internal control can be thought of as something that prevents or detects errors or omissions.

Preventive controls attempt to prevent or deter undesirable acts from occurring. They are proactive controls, designed to prevent a loss, error, or omission. Examples of preventive controls are separation of duties, proper authorizations, adequate documentation, and physical security over cash and other assets.

Detective controls attempt to detect undesirable acts that have occurred. They provide evidence after-the-fact that a loss or error has occurred, but do not prevent them from occurring. Examples of detective controls are variance analyses, supervisory reviews of account activity, reconciliations, and physical inventories. Both types of controls are essential for an effective internal control system.

A control conscious environment is also necessary. It is an environment that supports ethical values and business practices. Management is responsible for "setting the tone" for their areas and encouraging the highest levels of integrity and ethical behavior, as well as exhibiting leadership behavior that promotes internal control and accountability. The following steps are examples of this leadership behavior:

Communicate to employees that fraud and conflicts of interest will not be tolerated.
Communicate to employees that policies and procedures are important and will be followed.
Make employees fully aware of their responsibilities, including internal controls.
Monitor the internal controls system on an on-going basis (Washington University, 2004).

Adequate internal controls in the accounts payable (AP) process are critically important to protect against fraud. While the recent accounting debacles and the enactment of the Sarbanes-Oxley Act have brought the issue home to roost, accounts payable professionals have long been aware of the importance of all sorts of controls. At Carr, Cox, Douglas and Parrott (CCDP), we are dedicated to providing businesses with the tools needed to effectively define, develop, monitor, and reassess their internal control policies.

In reviewing the accounts payable internal controls of Jamona.com, several areas need to be addressed. CCDP has devised a tool to help with self assessment of internal controls. This questionnaire aids management in defining both weaknesses and strengths, and serves as a starting point in revamping policies and procedures.

Self Assessment of Internal Control

Purchasing/Accounts Payable Cycle

(State of Maine, n.d.)

After reviewing the results of the questionnaire, the management team is better equipped with the type of controls that should be adopted. To better explain the types of risks businesses are susceptible to; please refer to the chart below. Both the self assessment and the objectives/risks chart are tools to help prevent internal control issues.

Objectives and Risks

(State of Maine, n.d.)

Segregation of duties is essential to effective internal control. It reduces the risk ...

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Self Assessment of Internal Control

Purchasing/Accounts Payable Cycle

(State of Maine, n.d.)

Objectives and Risks

(State of Maine, n.d.)

Segregation of duties is essential to effective internal control. It reduces the risk of both erroneous and inappropriate actions, and is a deterrent to fraud. CCDP found Jamona.com to be in need of assistance in this area. To ensure proper separation of duties, no one person should initiate and approve a transaction, record transactions and reconcile balances, handle cash and verify deposits, be both a procurement card holder and a petty cash custodian, handle assets and reconcile perpetual records to physical counts, nor enter or approve a check request and have the check returned to himself. Jamona.com should correct all policies and procedures where evidence exists that support these findings.

Management has an important job of monitoring controls in order to detect, and correct anything that arises. CCDP suggests Jamona.com do the following: 1) perform budget to actual expense comparisons, and investigate significant differences, 2) routinely spot-check transactions, records, and reconciliations to ensure expectations are met as to timeliness, completeness, segregation of duties, propriety of the transaction, etc., 3) follow up on unexpected results or unusual transactions. They might be indications of theft or fraud, 4) ask for explanations of unexpected results, and ask for reasons for unusual transactions, 5) question the explanations and reasons if they don’t seem right, ask to see the items that were purchased, etc. (Washington University, 2004).

Management should also document reviews of reports and reconciliations by initialing, dating, and briefly indicating the resolution of any follow-up performed on any unexpected results or unusual transactions. These documents will be needed once the section is audited.

Adopting the tools and suggestions of CCDP above will improve the internal controls of Jamona.com. It will also help in assessing other risks within the organization. There is value added in the ability to detect, prevent, and correct internal operations.

References

State of Maine. (n.d.). Self assessment of internal control: Purchasing/accounts payable cycle. Retrieved December 14, 2004 from and .

Washington University. (2004). Guide to internal controls. Retrieved December 14, 2004 from .