...EFFECTIVENESS OF INTERNAL CONTROL SYSTEM Ascertaining Internal Control System Methods of ascertaining the control systems are summarized as follows: * Examining previous audit work, * Client’s own documentation of the system, * Interviews with client’s staff, * Tracing transactions, * Examining client’s documents, * Observation of procedures. a. Examining previous audit work: The audit work should provide a record of the previous audit and how the system operates. Any change in the audit work should be documented for updating. b. Clients own documentation of the system: Some organizations have their on Standard Operating Procedures (SOP). These Standard Operating Procedures provides source of information and to the existing control systems. It is therefore important to check whether the system as described in the (SOP) is what actually practiced. c. Interview with staff: During various stages of the audit, the auditor will need to some members of the staff of the client and find out how they carry out the assigned duties. These questions will reveal existing control and give indication of potential problems. d. Tracing transactions: Walk through checks allow auditors to identify any examples of actual procedures that vary from intended procedures. It also helps the understanding of the entire process as well as identification of risks. e. Examining client’s documents: The auditor can also ascertain the clients control systems...
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...INTRODUCTION Internal control, the strength of every organization, has become of paramount importance today in Nigerian banks. The reason being that the control systems in any organization is a pillar for an efficient accounting system. The need for the internal control systems in the organizations, especially banks, cannot be undermined, due to the fact that the banking sector, which has a crucial role to play in the economic development of a nation is now being characterized by macro economic instability, slow growth in real economic activities, corruption and the risk of fraud. Fraud, which is the major reason for setting up on internal control system, has become a great pain in the neck of many Nigerian bank managers. It has also become an unfortunate staple in Nigeria’s international reputation. Fraud is really eating deep into the Nigerian banking system and that any bank with a weak internal control system, is dangerously exposed to bank fraud. The CBN reported that cases of attempted fraud and forgery in banks, as at half-year 2007 have surpassed what was recorded for the whole year 2006. The CBN half-year report for 2007, revealed a total of 741 cases of attempted fraud and forgery, involving 5.4 billion, $35,406.1, 150 Euros were reported as at June, 2007. In 2006, 1,193 cases were reported involving 4.6 billion, $1.8 million and 14,389.7 pound sterling. The CBN also reported that the backward development was attributable to weaknesses in the internal control systems...
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...The Internal Control System Accounting is the process of identifying, analyzing, recording, summarizing, interpreting and reporting financial information to decision makers. Accounting information should be presented to society in a form that represents a true and fair view of operation. To accomplish this, accountants should have a clear understanding of accounting principles and concepts that govern the preparation of accounting statements and develop systems such as internal controls that assure the entity’s operations are properly and effectively recorded. Internal control systems help to ensure that the employees within an organisation carry out their duty and responsibility and act for the good of the business. There are certain key ingredients of a control system such as: environment control, risk assessment, control of flow of activities and monitoring. There are five main internal control procedures – proper authorization, segregation of duties, adequate documentation and records, physical safeguards over assets and records, and independent checks. Proper authorization of transactions and activities helps ensure that all company activities adhere to established guide lines unless responsible managers authorize another course of action. Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. Adequate documents and...
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...Justification for an Internal Control System Crystal Spencer University of Phoenix ACC/544 Internal Control Systems Christina Yang May 14, 2012 The purpose of this brief report is to justify the need for the internal control system in any organization, when controls are in place with an insurance and portfolio approach. An internal control system in any organization is a way to regulate, to reduce lost, to minimize risks, and to accomplish the organizational goals and success (McCarthy, 2004). The majority of organizations depend on the insurance approach and the portfolio risk management approach. These approaches are used to manage a business risk, whereas some businesses depend on the benefits of an internal control system. I will now explain the two types of approaches insurance and portfolio used in an organization. Insurance approach The insurance approach is generally used to ensure the acquirement to transfer certain types of risks that could affect the business property, the business assets, and affect the employees (McCarthy, 2004). The insurance approach used as a tool to prevent business losses; in addition, it is more like a financial risk tool than management risk tool. This approach will diminishes the impact of the losses, protecting the business assets from potential losses, therefore, making the insurance approach more reactive, than proactive (McCarthy, 2004). Portfolio risk management The portfolio...
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...for an Internal Control System Companies must mitigate risk to achieve maximum profitability. Mitigating the risk can be accomplished by implementing controls. While insurance and portfolio approaches are important control strategies, they are only single components of an overall risk management plan. Implementing an internal control system will assist management in monitoring and deterring risk. Current Controls The current approaches of insurance and portfolio are valid controls. One way to mitigate risk is to transfer some of the risk to a third party. The third party willingly accepts the risk for a fee or premium. This approach is called insurance. However, this approach is limited and considered reactive as it does nothing to deter harm to company assets. In addition, there are only certain risks that insurance companies are willing to take on and others that simply cannot be insured (McCarthy & Flynn, 2004). With the portfolio approach, all departments are treated as one unit so that interrelated risks can be identified and put “in the context of all the other risks and the company’s business strategy” (McCarthy & Flynn, 2004, pg. 255). However, it does little to deter risk. Internal Control System An internal control system is an ongoing process that ensures compliance with laws and regulations, reliable financial reporting and efficient and effective operations of an organization. According to Ratcliffe and Landes (2009), “an effective system of internal...
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...Internal Control Systems are very important for the risk management department of a company. This system helps keep the company protected from losing assets or incorrect use of assets. They also assist the company with keeping record and staying on track with objectives needed to be met. A controller’s duty would be to support management and the reporting of accounting and financial information. To start off, insurance and portfolios would complete the internal control system. Having a complete internal control system can further protect the company from risks. The controller is or can be an employee who’s job title is mainly to be the backbone for management when dealing with accounting and financial records that deal with the controls of organizations and organizational goals. If the main focus of the controller is financial controls and the financial process, along with the internal control system in play, the more genuine the information that the controller provides will be. Just having insurance does not guarantee that a company is protected from risks. Companies cannot ensure every risk. The insurance can cover things that happen to the company or facility and their equipment. Things that can be covered would be flooding, fires, or accidents that occur on their property. With insurance, the company is only expecting a small loss. A risk that is not protected by insurance would be a risk that can destroy the company’s reputation. It takes time to build a positive...
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...Internal controls, controls the risk of companies financial loss or misstatements. Insurance and portfolio theory are the combined methods of internal controls. This paper will justify the need of internal control systems, insurance, and portfolio approaches, and why an internal control system is more beneficial. An internal Control system is responsibility of the Controller to analyze company performance in operations, compliance, and reporting as well as aid management in the development of budgets and goals (McCarthy & Flynn, 2004). Internal Control system is also responsibility to analyze and manage risks the company may encounter. An internal control system is composed of five interrelated components (AICPA, 2013): • Control Environment – the company’s fundamental values and directives. • Risk Assessment – the identification and analysis of possible material misstatements. • Control Activities – the policies and procedures used to identify and manage risk. • Information and Communication – the processing and distribution information needed to meet company objectives. • Monitoring- assesses the quality of the system’s performance over time. Insurance approach is a risk-financing tool for companies providing protection when a loss occurs. Most companies have insurance because not many organizations will be able to pay expenses following a loss. Even though insurance compensate losses it does not prevent any fraud in the company. Certain companies have a variety...
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...Internal Control System Justification Brandy Ritz ACC/445 May 5, 2014 Bunney Schmidt Internal Control System Justification Internal controls are a good way to keep records up to date and valid. Insurance and portfolio approaches are great to have set in place for risk management, but a system of controls would provide extra security with the books. Below is an overview of insurance and portfolio approaches along with why internal control systems would enhance the business. Risk Management Approaches Insurance Approach Insurance policies give financial protection to businesses in the event of any losses. These losses are unforeseeable and help with risk management ("Investopedia", 2014). The first step in this approach is to categorize the risk and find the policy for those risks. The losses can cover property, income, and liability ("Insurance and Risk", n.d.). This approach is valid because having the insurance to cover economic or natural events will help rebuild a company. This helps give the business security. Portfolio Approach The portfolio approach has parameters defined both on an individual and combined basis. The purpose of this approach is to help make decisions that are more certain (Thomas, 2002). The contents usually include objectives, risk tolerances and constraints, and developing and implementing strategies. The portfolio needs to be monitored and adjustments made when changes occur (Thomas, 2002). The portfolio approach is a valid tool...
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...Course Title: Accounting Information Systems Course Code: ACC - 406 Course Instructor: Mohammed Sakhawat Hossain Assistant Professor, Faculty of Business & Economics, DIU Group… Assignment on INTERNAL CONTROL & COMPLIANCE FRAMEWORK FOR INTERNAL CONTROL SYSTEMS IN AB BANK Submitted to Mohammed Sakhawat Hossain Assistant Professor Faculty of Business & Economics Daffodil International University Submitted by Group Name: Group…….. Sec: A Batch: 22nd Program: BBA Faculty: Business & economics Daffodil International University ABOUT OUR GROUP ❖ Group Name: ……. ❖ Sec : A ❖ Batch : 22nd ❖ Program : BBA ❖ Faculty: Business & Economics ❖ Group member | | | | | |S:N: |NAME |ID |REMARK | | | | | | |01 |Soma Das |091-11-678 | | | | | | | |02 |Riza Ul Karim...
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...SETTING UP INTERNAL CONTROLS IN A CORPORATE ORGANIZATION BY OBATOMI JOSEPH(ACA, ACE ,HND (ACCA/ BSC APPLIED ACCOUNTING,OXFORD BRKS UN-IN VIEW) Every corporate organization either profit motivated or nonprofit motivated is exposed to one peril or the other. These perils could be financial or non- financial. These could be fire, accidents, natural disasters, and other destruction of assets. But the most frequent losses that businesses and non profit organizations suffer are from theft and embezzlement. The proximate cause of this write up is to enable firms to adopt the instrumentality of building and effective internal control to discover the inherent business risks and how to eliminate or reduce to a barest minimum and acceptable level. Your chiropractic practice, like all other businesses, must establish internal controls as soon as you open. Internal controls are those measures businesses use to guard against waste, error, and fraud. Losses can come from external sources, such as robbery and burglary, but they are most likely to come from internal sources, such as employee theft and embezzlement. My approach to setting up an internal control facility is to proceed according to a pre-defined process that has been broken down into stages. As each milestone is reached, I check that all intermediate objectives have been achieved. Vivid transparency must be exhibited throughout all planning and implementation phases so that the opportunity to exert an influence at every...
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...EURIDIS Research Monograph SCHEMATIC EVALUATION OF INTERNAL ACCOUNTING CONTROL SYSTEMS Kuo-Tay Chen* and Ronald M. Lee# * Department of Management Purdue University at Calumet Hammond, IN 46323 U.S.A. chenk@pucal.bitnet # Erasmus University Research Institute for Decision and Information Systems (EURIDIS) Erasmus University Rotterdam The Netherlands rlee@fac.fbk.eur.nl ERASMUS UNIVERSITY RESEARCH INSTITUTE FOR DECISION AND INFORMATION SYSTEMS Schematic Evaluation of Internal Accounting Control Systems by Kuo-Tay Chen and Ronald M. Lee Monograph No. RM-1992-08-1 (August 11, 1992) EURIDIS Research Monograph Erasmus University Rotterdam, The Netherlands © Kuo-Tay Chen and Ronald M. Lee Permission to copy this monograph without fee is granted provided that (1) the copies are not distributed for the direct commercial purpose and (2) this copyright page including the copyright notice, the EURIDIS monograph number, and date appear. TABLE OF CONTENTS CHAPTER 1. INTRODUCTION ...................................... 1 1.1 BACKGROUND .......................................... 1 1.2 MOTIVATION ............................................. 3 1.3 OBJECTIVE OF THE STUDY .......................... 4 1.4 ISSUES OF INTEREST .................................. 6 1.5 SCOPE OF THE STUDY................................. 7 1.6 CONTRIBUTIONS OF THE STUDY .................. 8 CHAPTER 2. DECISION AIDS RESEARCH FOR INTERNAL CONTROL EVALUATION .............................................
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...Introduction Internal control methods and measures are adopted to safeguard assets, enhance accuracy and reliability of accounting records, increase efficiency of operations and ensure compliance with laws and regulations. Control environment. The management style and the expectations of upper‐level managers, particularly their control policies, determine the control environment. An effective control environment helps to ensure that established policies and procedures are followed. The control environment includes independent oversight provided by a board of directors and, in publicly held companies, by an audit committee; management's integrity, ethical values, and philosophy; a defined organizational structure with competent and trustworthy employees; and the assignment of authority and responsibility. Control activities are the specific policies and procedures management uses to achieve its objectives. The most important control activities involve segregation of duties, proper authorization of transactions and activities, adequate documents and records, physical control over assets and records, and independent checks on performance. A short description of each of these control activities appears below. • Segregation of duties requires that different individuals be assigned responsibility for different elements of related activities, particularly those involving authorization, custody, or recordkeeping. For example, the same person who is responsible for an asset's...
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...SUMMARIZATION OF FIVE KEY ELEMENTS IN AN EFFECTIVE INTERNAL CONTROL SYSTEM NIKKI JORGENSEN RASMUSSEN COLLEGE / FINANCIAL ACCOUNTING Author’s Note: I Nikki Jorgensen am submitting this summary of an effective Internal Control System on this 10th day of September 2011to Gary Snyder’s A140/ACG1022 Section 10 Financial Accounting 1-Summer Quarter. Internal Control is a comprehensive system that helps an organization safeguard assets, operate efficiently and effectively, ensure proper reporting of financial information, and to be in compliance with any and all applicable laws and regulations. (Kemp, Waybright) (2010) (pg.296) In order to have an effective Internal Control System five key elements must be present. The five key elements required are: 1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication 5. Monitoring and Internal Control Limitations CONTROL ENVIRONMENT: The Control Environment sets the tone of an organization, providing discipline and structure. The oversight of operational activities and the ability to make key business decisions should be clearly outlined in the individual job descriptions. All employees should be expected to be competent to a broad range of professional skills which are common in any position in the organization, regardless of role. Management should be setting the tone for ethics within a business so that employees will follow. And last...
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...Impact of Internal control system over customer service in financial aspects Definition of Internal Control? Internal control or an internal control system is the integration of the activities, plans, attitudes, policies, and efforts of the people of an organization working together to provide reasonable assurance that the organization will achieve its objectives and mission. Four Purposes of Internal Control 1. To promote orderly, economical, efficient and effective operations and to produce quality products and services consistent with the organization's mission; 2. To safeguard resources against loss due to waste, abuse, mismanagement, errors and fraud; 3. To ensure adherence to laws, regulations, contracts and management directives; and 4. To develop and maintain reliable financial and management data, and to accurately present that data in timely report FOUR COMPONENTS OF INTERNAL CONTROL 1. CONTROL ENVIRONMENT Control environment is the attitude toward internal control and control consciousness established and maintained by the management and the employees of an organization. It is a product of management's philosophy, style and supportive attitude, as well as the competence, ethical values, integrity, and morale of the organization's people. The organization structure and accountability relationships are key factors in the control environment. 2. COMMUNICATION AND INTERNAL CONTROL Management should ensure that...
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...AN EVALUATION OF THE INTERNAL CONTROLS SYSTEM FOR CASH FOR THE CASE OF NAIROBI SMALL BUSINESSES BY CLEOPHAS MUSINGA A Management Research Project Submitted In Partial Fulfillment For The Requirements Of The Award Of Bachelor Of Commerce (BCOM), School Of Business, University Of Nairobi JULY, 2008 DECLARATION This research project is our own original work and has not been submitted for academic purposes in any institution of higher leaning. Name Number Sign CLEOPHAS MUSINGA D33/6646/05 ………………………….. This research project has been submitted for examination with my approval as the university supervisor Signed……………………………. Date…………………………………………. Mr. Abdulatif Essajee Lecturer University of Nairobi TABLE OF CONTENTS DECLARATION i CHAPTER ONE 1 INTRODUCTION 1 1.1 Background of the study 1 1.2 Statement of the problem 5 1.3 Objectives of the study 6 1.4 Research questions 6 1.5 Scope of the study 6 1.6 Justification of the study 7 CHAPTER TWO 9 LITERARURE REVIEW 9 2.1 Evolution of internal controls 9 2.2 Components of Internal Controls 12 2.4 Relationship between a firm’s age and internal control 18 2.6 Internal controls in small businesses 19 CHAPTER THREE 21 RESEARCH METHODOLOGY 21 3.1 Research design 21 3.2 Population 21 3.3 Sample and Sampling Technique 21 3.4 Data collection methods 22 3.5 Data analysis 22 CHAPTER FOUR 23 DATA ANALYSIS AND FINDINGS 23 4.1 Introduction...
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