Internal Controlsin in the Business World - Assignment Example

Prepaid expenses are an asset that a company must reflect in its balance sheet. The prepaid asset reduces in value through consumption as time passes. The contract value of the prepaid insurance was $6000 a year. After the passage of three months the firm was supposed to record $1500 worth of depreciation of the prepaid insurance asset to recognize the consumption of the insurance. The adjusting entry that should have been recorded each month was a $500 debit to insurance expense and a credit of $500 to prepaid insurance.

The credit is reducing the balance of the prepaid insurance asset. After three months the company’s financial statements are not accurate because the firm did not record the corresponding adjusting entry that was required. In the balance sheet of the company the current assets account is going be overstated by $1500. In the income statement the net income of the company is going to be overstated by $1500 due to the fact that insurance expenses for that amount were not recognized during the period.

One of the most important assets which must be safeguarded with accounting internal control mechanisms is the cash of the company. Cash is the most critical asset a company has because it is used to pay for operating expenses such as payroll, utilities, and rent and it is need to pay off monthly debt obligations. Due to the liquidity of cash it is often targeted by unethical employees for theft. According to the US Chamber of Commerce companies in the United States lose $50 billion annually due to employee theft (Quickbackgroundchecks, 2010).

Companies must create internal control procedures to deal with cash. A system that is often used to protect the cash disbursements of companies is the voucher system. “A voucher system is a network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper” (Weygandt, et. al., 2003, pg. 328). Companies in the retail business incur in a lot of cash transactions at point of sale terminals. These firms must institute internal control procedures to safeguard the cash.

An algorithm that could be followed at retail store to protect its cash is illustrated below: The cashier collects the cash from the customers and gives each customer a receipt after they are paid. Every four hours a manager closes the cash register and collects the cash. A receipt is printed by the cash register to document the transaction. The manager calls a courier to come pick up the money to be deposited at the bank. The courier enters a room in which cameras record the action. A security guard protects the door of the room.

The courier counts the money in front of the manager. The manager places the money in an envelope and closes the envelope. The envelope is placed in a briefcase which is later locked. The courier signs a document recognizing the amount of cash collected. The courier goes to the bank and makes a deposit. The deposit slip given to the courier at the bank is immediate faxed by the courier to the accounting department of the company. At the end of the month the accounting department cross references the bank statements with the daily cash deposits slips made by the couriers.

There are warning signs that can alert a manager of weaknesses in the internal control mechanisms of a company. A variable that can serve as a warning signs of an internal