Internal_Control_Systems_Limitations

I. Identify the limitations of the internal control system. Provide at least two limitations. Internal control is just another chaotic situation waiting to happen. This is because there really is no good control of what goes on within a business. Internal controls have its flaws and can easily be taken advantage or “beat.” Two employees if working together could very easily commit employee fraud. This is one thing that makes it seem like a lose lose situation, because if you try to make things stricter then you are spending more time and money but at the same time neglecting other important issues. The phrase “it can strangle a business with red tape” pretty much sums up the limitations the internal control system works with. Tight control means more problem arising, as where if it is too lenient then employees can easily take advantage. This is what would be considered a catch 22. II. Provide at least two examples of internal control procedures, and explain how these procedures can be implemented. One example of internal control procedures would be Documents and Records. These two can be completely different ranging from ledgers, invoices, journal entries, to purchase orders. In order to keep things from getting out or order and drawing attention to missing details, these documents should always be numbered so that there is no confusion. Another example of internal control procedures is Assignment of Responsibilities. A business with good internal control system never overlooks any important duty (Horngren, Harrison &Bamber, 1999). Every employee is assigned their own responsibility or duty without any lines being crossed. The best way to assure each person knows their task is to have an “organizational chart” that tells each employees duties. An example would be a treasurer and controller report to the V.P of the finance and accounting department. The controllers job is approving payments even though the the treasurer may actually sign the checks. The treasurer of course is responsible for money management. III. Identify symptoms of a lack of internal control. Lack of internal control is as follows, unreliable and unethical personnel; no duty or assignment of responsibilities; no internal or external audits; incompetents as well as unexplained errors. IV. Explain the impact of the missing journal entry on the financial statements of the company. The missing journal entry shows the insurance is paid before it is actually used. For example, if you expense $1300 in March, and the insurance is actually for April, May, and June, the expense has been paid before it actually happens. Having prepaid insurance is an asset. By not listing the insurance as prepaid, the balance sheet will not be correct, thus the income statement will list that there is more expenses than there actually is. You must then create an adjustment entry; however, the prior 3 months will be deficient. References Prentice-Hall Horngren, C.T., Harrison, W.T., & Bamber