Internal Control and Risk Evaluation – Kudler Fine Foods
Lisa Cook
University of Phoenix
ACC/542
August 15, 2011

Internal Control and Risk Evaluation Internal controls and risk assessments are an integral part for a company to be successful. Management at Kudler Fine Foods has reviewed the flowcharts prepared and is requesting information on controls that will be required. Risks are none to be a negative event occurring in a company’s productivity. Internal controls are the policies and procedures put in place to reduce unforeseen occurrences associated with the risks. This brief will discuss the risks of Kudler Fine Food’s current Accounting Information System (AIS) evaluated by Team B and incorporate the controls into the flowcharts, design internal controls to mitigate risks to the systems, evaluate the application of internal controls to the systems, and discuss other controls, outside the system, that Kudler Fine Foods may need.
Risks in the Systems According to Hunton, Bryant, & Bagranoff (2004), “business enterprises face a variety of risks, including business, audit, security, and continuity risks” (pg. 48). When analyzing Kudler Fine Foods current information system the team found that Kudler lacked internal controls and risk evaluations required to run their information system. Several concerns were brought up as major potential risks. The three risks focused on are those of business, security, and continuity. Several of Kudler’s risks within the system were noted in regards to payroll, accounts payable, accounts receivable, and the inventory system as well. Business Risks A business risk is the likelihood that an organization will not achieve its business goals and objectives (Hunton, Bryant, & Bagranoff, 2004). The business goals and objectives of any organization may be affected by internal risk at the organizational level, for example employee fraud. Internal controls are put in place to reduce these types of risk. One way to reduce employee fraud is a separation in duties. When examining Kudler’s information systems it was determined that specific controls for the separation of duties needed to be implemented in the four systems: payroll, accounts payables, accounts receivable, and inventory. The attached flow charts will explain the separation of duties for each system. (See Flow Charts below). Another control will be to implement an effective audit trail that will “enables managers and auditors to follow the path of the data recorded in transactions from the initial source documents to the final disposition of the data on the report” (Bagranoff, Simkin, & Norman, 2008, pg. 249). Audit trails are useful tools to identify any and all errors or suspicion of activity occurred. Security Risk According to Hunton, Bryant, & Bagranoff (2004) “security risk includes risks associated with data access and integrity” (pg. 50). It is important that Kudler Fine Foods implement written policies that outline the level of authority for each employee by its job description. Once the policies are created they then must be carried out by the appropriate level of access per employee assigned through their employee numbers and passwords. Continuity Risk Continuity risk is an additional risk for Kudler which is defined as “risks associated with an information system’s availability and backup and recovery” (Hunton, Bryant, & Bagranoff, 2004). In order to reduce this risk, it will be imperative that Kudler establishes adequate backup and recovery procedures to ensure the continuation of this operation. Application of Internal Controls Implementing designed controls is just a portion of the control process. It is necessary for Kudler’s management to evaluate the effectiveness its controls that are in place and create the proper documentation of its policies and procedures. With the size of Kudler’s business it would be feasible to have an independent party evaluate their current control procedures which will determine if they are effective which management may not have the understanding it the control procedures. Once Kudler generate a policy and procedure manual it will be important to include the following: 1. A chart of accounts that describes the purpose of each general ledger account so that employees enter the debits and credits of accounting transactions in the correct accounts. 2. A complete description of the types of source documents individuals must use to record accounting transactions. Also, include the correct procedures to prepare and approve the data for these documents. A comprehensive description of the authority and responsibility assigned to each individual (Bagranoff, Simkin, & Norman, 2008). Incorporating these practices will maximize Kudler’s control procedures that will reduce future risk.
Controls Outside of the System In addition to the implementation of Kudler’s internal controls, some external controls need to be considered. It is of great importance that Kudler implement controls that will reduce the risk of external threats. Using security suite that offer firewall, anti-virus, anti-spam, and anti-spyware controls will benefit Kudler in the long run. Thought this software will not entirely reduce external threats, it will help with reducing some of the threats that will come up. Internal controls and risk assessment are important to the continuing success of any organization. Kudler will achieve great success if they continue to implement internal controls designed to mitigate the identified risks. It is also necessary for Kudler to monitor the controls stated within this brief. Kudler responsibility will be to identify and implement controls to protect against any external risks that may arise. (See flow charts)

Payroll Flowchart

Controls: 1. Assign employee numbers 2. Review by HR manager 3. Maintained by HR assistant

Accounts Payable Flowchart
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Time Keeping

Payroll Processing System

Payroll Master
File

Human Resource

Process Paycheck

Process Payroll Reports

Employee

Management

Government
Agency