Internal Control and Risk Evaluation Essay
Internal Control and Risk Evaluation
In today’s society, internal controls are applied to support an organization’s managers to become more successfully to release the responsibilities by applying and understanding internal control concepts. Internal controls are most frequently saw as “a lot of red tape”; however, internal controls have different circumstances when confirming high moral and ethical values which should be communicated in an organization. Internal controls are essentially composed of five interrelated components which are communication and information, monitoring, control environment, risk assessment, and control activities. The four areas of concerns are accounts receivable, payroll, accounts payable, and inventory. The identification of risks in the system, how the risk would be merged into the flowcharts, the internal controls that must be used, and an evaluation of the internal control system, and outside controls must be used. The biggest vulnerability area is accounts receivable because of an auditing and accounting perspective this is where the point money is received into the organization. In the flowchart, account receivable is recognizable as the point where payments will be posted. Account receivable has a secondary risk area in which the late charges, interest and other fees are added.
The area of payroll is where the main risk concern will always be an individual superseding payroll internal controls. An additional internal control that can be applied by use of flowchart designs will be for authorized individuals having access to the authentic payroll processing function that provide access for authorizations of direct deposit/ or the printing of the payroll checks. Authorization is the main internal control area with accounts payable. The nonexistence of authorization is the major weakness, which can be in the form of control overrides in the AIS and physical form. As associated to the flowchart, there is an important weakness that will exist in the process from the requesting department to other areas. The most critical internal control point is the inventory because of the physical counts corresponding with the AIS records. On the flowchart, inventory is identified as the point where inventory levels are maintained and tracked because of the easy access the area poses the biggest risk. Risks in System
The risk with using any accounting software will always have uncertainties. Some of the risks are human error data input, security breaches, and fraud that put increase pressure on management staff in maintaining or achieving financial targets which have intensified the risk of inappropriate accounting or disappointment to disclose associated party transactions. The statement above only means that the organization needs to have security controls that forbid management from manipulating data for investor purposes. Another essential risk would be the establishment of illegal programs which delete or access files, corrupt files by the installation of a virus, changing the programs that cause unacceptable data to process. “Threats and risks to databases might include unauthorized access that allows altering, deleting, corrupting, destroying, or stealing data” (Beard and Wen, 2007, p. 212). To conserve the loss of important data using backup files are crucial that will be overwhelming to an organization. The organization’s good reputation will be at risk if essential information reporting is misused, misdirected, and could cause damage to the competiveness of the organization. Internal Risks and Controls
In the society today many hackers is known to have both external and internal risks that can ruin an organization security systems. Therefore, the collection of data is critical to establishing virtuous security controls for external and internal that ensure complete secure transactions, verification of the data is valid, and free from errors. “Tapping into the organizations telecommunication lines can be an activity that may seriously impact the data collection” (Beard and Wen, 2007, p. 217). Integrating exceptional internal control methods are a requirement to address exposure to major risks in an organization electronic accounting system because the responsibility primarily on the management staff. Creating and maintaining active internal controls includes the assessment, testing, and documentation of internal controls which includes operations, access, program development, and changes. Internal Controls to Mitigate Risk
Eliminating risk of internal controls is by establishing some of the following: Maintenance of records that detail and reflect all transactions Disposition of said transactions including the disposition of the assets Record transactions accurately to permit valid financial statements in accordance with GAAP Implement timely and decisive detection of unauthorized transactions Evaluation of Internal Controls
For Kudler Fine Foods to certify appropriate application of internal controls into the organization systems, control activities must exist. The internal controls will include but are not limited to activity or functional management evaluations, transaction assessments, reconciliations, statistics processing and physical controls, and separation of duties. The evaluation of application of internal controls inside an accounting system should be ongoing and frequent. Kudler Fine Foods must make sure the organization maintain acceptable resources, make available financial, operational, and compliance with correlated information. The organization employees’ obligations and control responsibilities should be successfully communicated while ensuring compliance is the number one imperative factor. Kudler Fine Foods channels must exist for every individual to report alleged improprieties and the employee recommendations are petitioned and acknowledged.
Beard, D. and Wen, H.J. (2007). Reducing the Threat Levels for Accounting Information Systems. Challenges for Management, Accountants, Auditors, and Academicians. Retrieved August 12, 2009 from: http://www.nysscpa.org/cpajournal/2007/507/essentials/p34.htm University of Pennsylvania, (2009). Internal Controls Self-Assessment: A Guide to Internal Controls. Retrieved August 13, 2009 from: http://www.sru.edu/pages/1511.asp