Justification_for_an_Internal_Control_System_Paper

JUSTIFICATION FOR AN INTERNAL CONTROL SYSTEM PAPER Justification for an Internal Control System Paper University of Phoenix ACC544 Internal Control Systems Michelle Caron August 2, 2010 Justification for an Internal Control System Paper Internal Control Systems are a vital part in a company’s risk management. They protect the company from loss or misuse of assets and help the company keep on track with its mission and objectives. As a controller, our job is to support management and their accounting and financial information and reporting. Insurance and portfolio approaches are the beginning steps in a cohesive internal control system. To further protect the company from risks, the company should encompass a complete internal control system. Controller Perspective A controller is an employee who supports management with accounting and financial information regarding organizational goals and controls. With a focus on financial controls and processes, a controller oversees all aspects of the accounting and financial activities, information, and data for the company. The better internal control system in place, the more reliable the information provided by the controller. Insurance Approach Some companies believe that as long as they have insurance, then they are covering themselves against risks. Unfortunately, companies cannot ensure all risks. Companies obtain insurance to cover the risks of fire, flooding, accidents that happen on their premises, and damage to their equipment and facilities. With insurance, the company is expecting a certain minimum loss against the probability of a catastrophic loss. One of the biggest risks that cannot be covered by insurance is risk to the company’s reputation. It takes years to build a superior business reputation and it can only take a day to destroy it. Portfolio Approach A portfolio approach involves creating an understanding the company, their interactions, and their goals. Understanding the company goals would include both short-term and long-term goals. The approach involves understanding where the company is going and where the company should go. Understanding the company environment would involve knowledge of the operating world, including economic, political, and technical. Understanding the company would involve the organization culture, including your company’s strengths and weaknesses. Understanding the company’s interactions would involve identifying your options. Lastly, understanding the company’s knowledge base and assessing the threats and opportunities the company faces. A portfolio approach analyzes the company’s risks by type and gives the company a balance between the risks and the returns. Importance of Internal Controls System Few things are as important to a company as internal controls. They help mitigate the risks of doing business. It is a way to provide reasonable assurance that the company’s mission and objectives are being accomplished, the financial reporting is reliable, and the company’s assets are safeguarded against waste and fraud. They also ensure compliance with applicable laws and regulations. Controls are designed to protect the company from loss or misuse of company’s assets. Internal controls cannot eliminate errors and irregularities, but they can alert management to potential problems. All internal control systems should be properly documented and distributed throughout the organization. A big part of the internal control system is the internal control policies and procedures. These policies and procedures are in place to ensure adequately that all transactions are properly authorized; there is separation of duties; accounting records and documents are correctly recorded and maintained; there is controlled access to records and assets; and that accounting data are compared with the items they represent. There should be extra controls in place where cash transactions are recorded. Even though the company is small, we can still ensure that there is a separation of duties. The person signing checks should not reconcile the bank statements. The person receiving collections should not be the same person who posts the transactions and makes the bank deposits. Management is responsible for the internal control system of the organization. Management sets the tone of the company, educated the employees about the importance of internal controls, and put the internal control systems into operation. Evaluating the effectiveness of the internal control system is a responsibility and top priority of management and should be reviewed as an ongoing basis. Management must take an active role in the internal controls. No internal control system is foolproof so it must be continually reviewed for its value and usefulness. Management must set the tone of the organization with the importance of internal controls. There should be consequences for those employees who do not comply with approved internal control policies and procedures. Employees should be encouraged to communicate any situation that is not currently address by the internal control policies and procedures, so that they can be reviewed and incorporated as necessary. Employees should feel confident with reporting any potential wrongdoings or violations of the internal controls with the incorporation of a company confidential hotline. Conclusion Internal control systems are an integral element to reducing risk for management. It is a way for the company to protect itself from potential fraud and the misuse of company assets. There are many ways to go about incorporating an internal control system. The first step is to ensure that insurance is in place to reduce company loss. The second step is the get an understanding of the company’s tone, mission, goals, objectives, and risks. Management must enforce a cohesive internal control system to include policies and procedures. As part of the internal control system, there should be a confidential company hotline for employees to feel safe to report any potential unlawful activity or abuse of the internal controls. Reference Answers Corporation. (2010). Reference Answers. Retrieved August 2, 2010, from the World Wide Web at: http://www.answers.com/topic/internal-controls Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2007). Auditing & assurance services: A look beneath the surface. 2nd ed. New York: McGraw-Hill/Irwin. 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