The Importance of Monitoring of Internal Control Procedures - Assignment Example

ACCOUNTING STANDARDS Introduction Accounting standards refers to streamlining financial reports and statements for them to comply with regulations, policies and laws set. Accounting standards are integral elements in any organizations since they help a firm compares with the competitors, highlight its financial status, and help investors make informed choices based on the equity, debts and capital rates of an organization. Assignment 5 1. The importance of monitoring of internal control procedures Internal control procedures are defined as processes and systems in an organization within its culture, strategies, structures and work processes implemented to propel the organization to achieve its objectives and visions (Hightower, 2008, p. 34). Internal control procedures are consolidated into control activities, risk assessment, the ecology of control, communication frameworks and data storage and retrieval (Graham, 2007, p. 65). Through internal control, an organization is effectively and efficiently able to analyze, guide and measure its resources (Kwok, 2005, p. 54). The procedures entails giving reliable financial reports, abiding by policies and governing regulations and provision of updated feedback of the ability and inability of an organization to achieve its strategic and operational objectives (Graham, 2007, p. 57). Internal control procedures are essential in any profit and non-profit making organizations because it helps in detecting and preventing fraud, organizations are able to effectively counter any probable risk by safeguarding the tangible and the intangible resources of a firm (Martin, 2006). Moreover, the procedures allow organizations to make predictable outcomes since they help in reduction and minimizing of process variations, and improve business efficiency and effectiveness thus increasing an organization’s profitability and market share (Kwok, 2005, p. 89). For effective and efficient internal control procedures, organizations can invest in initiating systems of inventory management, proper management of petty cash and differentiation of accounting duties based on accounts paid and accounts received (Hightower, 2008, p. 131). 2. Compliance testing Compliance testing refers to processing, assessing and evaluating if systems and products are aligned against set regulations and standards in order to promote efficiency. Regulations may be legal, governmental or safety measures (Graham, 2007). Means of performing confirmation testing Compliance testing can be performed by verifying that implementation of running systems and applications is consistent with the needs of the firm and any other necessarily requirements to promote system integrity and accessibility. Another means of performing confirmation testing is by verifying that an application that is used meets the criteria requested by the stakeholders and markets (Martin, 2006). Moreover, verifying that technology, information and communication frameworks and tools are put in place thus influencing effective creation, establishment and documentation of accounts, system continuity, security and management procedures (Graham, 2007). Finally, the other means of confirmation testing is by verifying that work process and security controls that safeguard an organization’s connections to other systems are established, recorded and are effectively aligned to market/ client requirements (Hightower, 2008). Confirmation testing as used in internal control helps organizations to exploit opportunities, achieve set objectives, improve an organization’s capitalization, reduce the chances of facing risks, allow initiation of appropriate strategies and influence effective organization change (Kwok, 2005). 3. Individuals who should not be included in an internal control committee The internal control committee play an important role when auditing, in that it helps in offering assistance in implementing internal control procedures, it analyzes the system applications and controls, it give their own assessments and reviews the auditing board, and analyze the usage of accounting principles and standards by managers and auditors (Martin, 2006). Furthermore, the internal control committee monitors compliance of an organization to international financial reporting standards, assess how effective the reporting process used by an organization is and give their reviews on the deliberation, establishment, documentation and management of the internal control processes and systems and regarding probable threats to the organization (Graham, 2007). Different organizations in different countries have different needs, operations styles and threats thus different internal control committees because When deliberations and considerations are being made regarding who should be a member of an internal control committee, there are people or organizations that are not eligible for membership (Kwok, 2005). An internal control committee that is not inclusive of independent directors from outside the organization, that does not have at least one member with financial expertise, does not qualify as an internal control committee according to international auditing standards (Martin, 2006). Moreover, members should not hold executive positions in the company. The chairman of the board of directors cannot be appointed to be the chairman of the internal control committee. 4. Importance of internal control questionnaire There are various methods used for data collection during internal control tasks and processes. Among such methods is the use of an internal control questionnaire (Graham, 2007). Internal control questionnaires consists of a list of questions with multiple choices of ‘yes’, ‘no’, ‘ comments’ and ‘ I don’t know’ that auditors can use to detect threats and fraud, gather necessarily data and help auditors evaluate and assess business operations and work processes (Kwok, 2005). The advantages of using the questionnaire is that they can be kept to be used for future references, have a longer shelf life, auditors are able to capture large amount of data within a short period of time by using questionnaires, and auditors are not likely to deviate from their objectives and the intended questions (Hightower, 2008). Questionnaires are not subject to auditor bias and are not affected by their personal values and attitudes (Martin, 2006). Moreover, they help auditors assess controls on cash, ease verification of reports on business processes and system applications, ensure accurate, up dated and effective financial reports are submitted and measure how knowledgeable employees are on accounting standards (Kwok, 2005). Internal control questionnaires show opportunities, risks and which points the organization is weak or strong at (Kwok, 2005). Furthermore, help assess effectiveness of current accounting practices, policies, and procedures. 5. Evaluation questionnaire for the dispatch function in a typical warehouse Internal Control Questionnaire Department: Dispatch function Department ID: xxxx Name: xxxx Phone: xxxx xxx xxx Date: 30th October 2010 Email: xxxx Procurement of products and inventory control Procurement of products and inventory control yes no No information remarks 1. Does your purchase have state sales tax on them? 2. Do you reconcile purchases/goods received In the monthly financial statements? 3. in order to avoid higher approval Levels and bypassing limits, Does your division split orders? 4. Does the inventory department depend on the Purchasing Department for bids for goods and services co-ordination? 5. Purchases exceeding required limits which are not bid do the inventory section monitors and forward them to purchasing section irrespective of supplier? 6. Do you receive competitive written bids for any purchase made? 7. Is there enough security for inventory items? 8. Do you have well organized inventory? 9. Do you adhere to set regulations and standards when storing and disposing off any controlled substances? 10. do purchase orders and Invoices correspond with receiving documents? 11. Do you have enough safety measures against water and fire? 12. Do you normally inspect, tally received goods before allowing them into stores and inventory records? 13. Do all withdrawals done, made with accompanying authenticated documents? 14. What basis are inventory records maintained at? 15. Do you use safety measures when storing inflammable items and products? 16. When replenishing stock, do you use automatic reorder quantities? Assignment 6 1. Three main objectives of internal auditing The main objective of facilitating internal auditing is for an organization to be able to be effective and efficient in its operations, thus assessing its financial position and gauge itself against its competitors (Moeller, 2009). Another aim for internal auditing is to help management to identify processes and operations that have been frauded or misappropriated, and learn which opportunities the organization can invest in to increase its market capitalization by conducting reliable financial reports (Gay, 2006). Another objective of conducting an internal audit by an organization is to assess threats and risks that will hinder achievement of objectives and making sure its accounting practice complies with the set standards and regulations (Blake& Lunt, 2001). Moreover, internal audit allows investors make informed choices on the best organization’s products and services to invest in and where their investments are at minimal risks. 2 a). who is responsible for preparing annual financial statements? Majority of profit and non-profit organization have accounting departments, comprising of accountants who do monthly financial reports of all income and expenses accounts in various departments of the organizations (Moeller, 2009). This eases the process of consolidating financial reports and statements at the end of the year. b). the reason for opinion of independent public accountant to accompany financial statement Most shareholders in organizations insist that financial statements be accompanied by the opinion of independent public accountant because they are more likely to give objective, accurate and honest reviews since they have no vested interests (Blake& Lunt, 2001). There are managements that give false financial reports to cover malpractices, losses, debts that an organization may be experiencing in order to maintain the public’s interest. c). the need for an internal auditor An internal auditor unlike an external auditor is under employment of the organization he works for and he offer reviews on effectiveness and efficiency of business processes and systems to counter risks and conduct internal control procedures (Blake& Lunt, 2001). External auditors however, form their reviews and assessments on if the financial statements are truthful and fair (Gay, 2006). Although they are similar in some instances like they both are concerned about information frameworks, operate under professional code of ethics and standards and rely on internal control tools to conduct their financial reporting and analysis (Moeller, 2009). d). reasons why it is imperative to base financial statements on generally accepted accounting principles Any financial statements and reporting need to be based on generally accepted accounting principles. They are guidelines that accounting practice use while documenting, making reviews and preparing accounting statements (Blake& Lunt, 2001). They entail standards, regulations, and conventions. The reason why they are highly advocated for is because they make sure any data contained in financial statements are accurate, consistent, true, and can be relied on (Gay, 2006). Moreover, allow organizations to detect fraud and misappropriation of funds. The principles allow financial statements to have standardized principles on consistency, accuracy, disclosure, compensation, continuity, utmost good faith, periodicity, regularity and reliability among other essential accounting principles (Blake& Lunt, 2001). e). the need for accuracy in preparing company records by internal auditors It is essential for an internal auditor to prepare accurate and correct financial statements. This is because, their reports and records are relied on to make financial decisions like investing, taking loans, giving dividends to shareholders, floating shares, and investors rely on their financial statements in order to decide where and when to invest (Moeller, 2009). Despite the fact that external auditors check and verify financial statements made by internal auditors, internal auditors are guided by professional standards to offer the best of their skills and give accurate information regarding what the organization owes, own and what belongs to the owners of the organization (Gay, 2006). 3. The steps to follow before accepting to audit a new client Since Good One Ltd is a new client, as a partner of James and Allen Public Accountants, we need to familiarize ourselves about operations and industry that our new client is involved with by reviewing audits previously done, observe the business process of the client by physically visiting them, collect information about the client and the industry from the press, the web, guides and references and direct inquiry to the management. The second step is to analyze the client’s financial statements which consist of the balance sheets, cash flows, income statements, costs of sales records among others (Gay, 2006). The third step is to analyze the client’s transactions by assessing invoices, receipt books, payrolls, delivery and purchase notes, ledger records, inventory statements and cash books among others (Moeller, 2009). The final step is to analyze audit tools, standards and systems used by the internal auditors. Audit tools include risk assessment tools, analytical internal control audit tools, materiality decision audit tools and audit plan programs (Blake& Lunt, 2001). This ensures that the organization follows stipulated accounting principle guidelines, and has respect for transparency and accountability in accounts. 4. steps to follow on accepting to audit a new client -plan and assess risks; this entail collecting data about the client, accounting regulations and policies based on the industry the firm operates and information systems of the organization (Gay, 2006). Moreover, assess the risk of conducting the audit for that particular client. -Assessing internal controls; this entail analyzing the efficiency of internal control procedures, assess the inventory management, analyze the organization’s accounting duties and evaluate how much work the audit will have (Moeller, 2009). -Substantive procedures; they entail assessing financial statements prepared by the internal auditors are accurate, reliable and align to regulations and standards set (Puttick, et al., 2008). Finalization; this entail the auditor formulating a report on details regarding the audit, analyze and assess the evidence of the audit to ensure its appropriateness and sufficiency and finally, the auditor decides which type of opinion and review audit to give to the management based on the evidence collected (Blake& Lunt, 2001). 5. Reasons why external auditors need to be independent have integrity and professional responsibility The main reason why external auditors need to practice integrity, professional responsibility and independence is because they are relied on to give accurate, reliable and honest opinions, reviews and audits by the stakeholders (Moeller, 2009). They also do this to comply with international financial reporting standards that instruct auditors be they internal or external to be honest, ethical, objective, be professional and offer the best service they know how using the best of their knowledge and skills (Gay, 2006). 6. How an audit committee assists the internal auditor The audit committee assists the internal auditor by ensuring that relevant information on finance and transactions is made available to internal auditors to make accurate and reliable financial audits (Moeller, 2009). Audit committees ensures that internal auditor’s work is made easier by advising the management on implementation of effective business processes in regards to internal control systems, independence and managing risks (Puttick, et al., 2008). Moreover, implementation of threats assessments, compliance to accounting standards, upholding ethics and ease in disclosing financial matters (Gay, 2006). Assignment7 1. a). Constitution of a non-profit organization A constitution can be termed as written document with consolidated regulations and legal entities that are developed and agreed upon by a group or associations of people, to govern, highlight and safeguards their roles and duties, processes, structures, authorities, behaviors and rights (Porter, et al., 2008). Non- profit organizations are corporate entities with minimum 5 members whose work processes and objectives are not profit oriented (Greuning, 2001). Most non-profit groups are involved in non-profit activities socially, religiously, professionally, educationally, in arts, scientifically, in charitable works and sports among other areas. For non-profit organizations, constitutions are more often than not referred to as articles of association and memorandum of association (Porter, et al., 2008). The constitution for non-profit organizations give guidelines on where resources shall be allocated to, membership laws, how to elect board of governors, regulations and ethics guiding every individual member, instructions for share capitals and profits from investments, guidelines on winding up, membership privileges, scheduling of meetings and possible constitutional amendments among other things (Porter, et al., 2008). b). Purpose of constitutions Constitutions play an important role in any profit and non-profit organizations. Constitutions help safeguard the rights of stakeholders, offer punitive measures for erroneous members or stakeholders, give guidance on important issues such as implementation of strategies, membership privileges, prevention against theft and fraud, misappropriation of funds and making sure that the aims and goals of the non-profit organizations are implemented, properly managed and achieved. 2. Internal controls that should exist in a non-profit organization There are basic internal controls that should exist in any organization more so a non-profit making organization. These controls make sure financial standards are complied to, threats are assessed, and ensure business processes and operations are carried out efficiently and effectively (Greuning, 2001). In a non-profit making organization there should exist preventive internal controls. These controls are integrated into the operating systems in order to prevent threats and reduce costs that may arise while reconstructing (McMillan, 2010). For example, an organization can have access or entry controls, where persons with approved documentation and cards are the only ones who are allowed to transact or access organization’s financial accounts (Greuning, 2001). Detective internal controls are the other form of internal controls that a non-profit organization can install in its operations and systems. What these internal controls do is to assess and analyze potential risks (Gross, 2010). Moreover, there are organizational internal controls, duties and roles segregation controls, assets control, documentation controls, accounting controls, and management internal controls (McMillan, 2010). There are automated internal controls which are technologically sourced and manual controls where designated signatures are used to verify authenticity of documents and authorization to perform various tasks. 3. How an external audit assists a non-profit making organization non-profit making organizations not only seek the services of external auditors because there have extra cash to spare but because they are obligated to in the compliance requirements, external auditors are independent, therefore they offer objective opinions and reviews based on the audit evidence they have collected (McMillan, 2010). Such organizations benefit greatly from the service of external auditors since external auditors more often than not have, have a wide range experience than internal auditors since they audit different audit entities and different industries (Greuning, 2001). They are in a position to advice non-governmental organizations on what they are doing wrong, advice and recommend them accordingly. Additionally, external auditors assist non-profit making organizations by increasing the credibility and reliability of their financial reports and appraise their management processes and strategies on risks, information and communication, internal controls and governance (Gross, 2010). 4. Reporting requirements for not-for-profit organization Many have argued that financial reporting for non-profit organizations should be similar to those of profit making organizations. Non-profit organizations and their stakeholders like donors base their reporting on functional expense records in operations of their business and operation processes, solving internal and external financial problems and when making decisions (McMillan, 2010). In the recent past, non-profit organizations have misreported and misguided donors regarding their expenses and government boards on how much they receive from donors. Their reporting requirements are that they should give full details on their expenses, donations received, and capital gifts (Greuning, 2001). More so, provide financial statements that are accurate, consistent, and reliable and has had an opinion and review of an external auditor (Gross, 2010). Since most not-for- profit organizations are tax exempt, they are required to submit annual financial reports in accordance to IRS reporting and guidelines which contain balance sheets, income statements, object revenues, functional expenses report, expense statement per program and a schedule which indicates their source of revenues (Gross, 2010). Among other reporting requirements are establishment of an audit committee, inclusion of at least one financial expertise in the audit committee, use different external auditors after a stipulated period of time to improve objectivity, and to elect new audit committee members every so often (McMillan, 2010). 5. Accounting standards relevant to an auditor auditing for a not-for-profit organization There are accounting standards complying with Australian Accounting Standards that an auditor may find necessary to include while auditing for a not-for- profit organizations. Among the accounting standards relevant are AAS 6, accounting policies: determination, application and disclosure and AASB 1001 accounting policies- disclosure (C.F.S.C., 2005). This standard is necessarily because it ensures that the organization gives full retails of operations, processes and transactions of donations, in-kind gifts and expenses thus allow reports to be accurate and true. AAS and AASB 1004 disclosure of operating revenue accounting standards which is important because it shows the organization’s source of revenues, since they usually are tax exempt (C.F.S.C., 2005). The other accounting standard is AAS 8 and AASB 1002 events occurring after balance date. This helps capture information and operations that would otherwise not be included in the financial reports (C.F.S.C., 2005). Moreover, there is AAS 21 and AASB 1015 accounting for the acquisition of assets which allow auditors to figure out how much has been received and how much have been spent thus shading light on what the amount of the remainder is, what proportion the organization should anticipate to receive from acquisition of new assets (Porter, et al., 2008). 6. Development of operational auditing and how it has affected the functions of internal auditors More and more profit and non-profit organizations are finding it necessarily to conduct operational audits over their financial audits. Operational audits measures effectiveness and efficiency of the internal processes and systems of an organization in production and service delivery (Greuning, 2001). Most companies prefer to use external auditors to conduct operational audits since they are independent are likely to give unbiased opinions based on audit evidence, thus making internal auditors sidelined sometimes (McMillan, 2010). These audits allow management refocus their strategies and have a deeper understanding of their cost allocations. Operational audits increases flow of work, help to make immediate and effective decision on implementing organization change, analyze the ability of the organization to perform and comply with set budgets, standards and policies (Porter, et al., 2008). Other elements that are assessed are organizational structures, work processes, management procedures, and controls, usage of resources, wasted capital, cost allocation and efficiency of organization processes (Gross, 2010). Operational audits can be performed by internal auditors which help organizations to get a deeper insight on the best processes, practices, procedures and controls that will cut costs, increase profitability, increase market capitalization and market share (Greuning, 2001). Organizations learn from operational audits how various activities are performing, and auditors offer recommendations and suggestions (Porter, et al., 2008). Assignment 8 1. Situation when an auditor would be disadvantaged if ethical conduct rules were not developed Auditors and accountants are bound by professional code of ethics and compliance to international accounting standards which instruct them to be objective, sincere, prudent, and show utmost good faith (Hoffman, 1996). If an accountant was to audit for a profit making firm, and the management wanted to cover up embezzlement of funds, source of their revenues or even cover up losses, they will try to influence the opinions of the auditors and even go as far as bribing them. If caught, the auditor can be charged for economic crimes, corruption and the intent to mislead the government or the public (C.F.S.C., 2005). The code of ethics is beneficial to them sincere they advocate for transparency, accuracy and reliability of audits based on audit evidence collected (C.F.S.C., 2005). This helps in preventing cases of fraud, theft, financial crises and losses felt by shareholders and investors which lead to organization shutdown. 2. The importance of observing rules of ethical conduct It is imperative for auditors to observe the rules of ethical conduct when conducting audits. This is because their opinions are not only relied by the management to make decisions, acquire more assets, allocate costs, device ways to increase profits, efficiency and effectiveness of their processes, functions and operations but shareholders and stakeholders rely on them too (Hoffman, 1996). Shareholders need this information to make decisions on when to invest and assess the financial viability of the company (C.F.S.C., 2005). Investors and government institutions rely on audit reports to make informed choices on where and when to invest and budget allocations respectively (Gross, 2010). Observing rule of ethics improves the accounting profession environment, improves reputation of the profession and accountants, improves the levels of accountant’s discipline and reduces cases of legal liabilities (C.F.S.C., 2005). a) What would happen to an individual if they do not observe the rules of ethical conduct? Individuals who do not comply with the rules of ethical conduct when conducting audits become ineffective in their duties since they give biased, inaccurate and unreliable opinions and reviews (Hoffman, 1996). Individuals found infringing on these rules are either warned, put on notice or their certificates of practice are cancelled (Gowthorpe & Blake, 1998). Those suspected of breaking the rules are charged relative to what they have done. b) What would happen to the accounting profession if they do not observe the rules of ethical conduct? If auditors continually ignore the rules of conduct and standards set for them while practicing, the accounting profession will lose credibility and trust in the public eyes (Gowthorpe & Blake, 1998). More and more people will look elsewhere to receive information they are looking for. The profession will be perceived as a joke and unnecessary costs for an organization to procure their services (Greite, 2007). 3. How the accounting profession ensures accountants observe ethical standards If there are loopholes in the rule based auditing, the accounting profession proposes principle based auditing to eliminate chances of fraud and malpractices by auditors. Accountants are taught to self regulate by being credible, confident in the accounting practice, be professional, and ensure they give quality services (Hoffman, 1996). Accounting profession ensures accountants adhere to ethical standards by routinely educating them about ethics, taking high scoring students only to pursue accounting, and forming new regulations and reforms to counter emerging ethical issues (Gowthorpe & Blake, 1998). Additionally, the accounting profession has set up punitive measures that are used to punish and reprimand erroneous accountants (Greite, 2007). 4. Ethical pronouncements when establishing a chartered auditing firm There are ethical pronouncements that Terry Smart will encounter. This include the regulations on advertising as an auditing practitioner which entails defining which service he is going to offer and the best advertising media to use in order to reach his prospective clients. He should also consider aligning his business objective with the needs of the community he has established his business in. he is supposed to live to his code of ethics offer unbiased opinions, be accurate, honest and transparent in his dealings. 5. What accountants do to ensure they observe ethical pronouncement satisfactorily Accountants and auditors ensure they are observing the ethical pronouncement satisfactorily by making sure they give opinions based on audit evidence (Hoffman, 1996). Moreover, they are guided by standards set, thus they ensure their auditing processing and reports are accurate, sincere, comply with financial standards and they recommend and advice management accordingly (Greite, 2007). Conclusions Accounting standards refers to streamlining financial reports and statements for them to comply with regulations, policies and laws set. Accounting standards are basis for internal controls. Internal control procedures are defined as processes and systems in an organization within its culture, strategies, structures and work processes implemented to propel the organization to achieve its objectives and visions. For effective internal control processing, confirmation testing is needed. Compliance testing refers to processing, assessing and evaluating if systems and products are aligned against set regulations and standards in order to promote efficiency. Regulations may be legal, governmental or safety measures. Any accounting task should comply with standards of accounting and observe ethical standards. References Blake, J., Lunt, H. (2001). Accounting standards. Cessnock: Financial Times/Prentice Hall. C.F.S.C. (2005). Australian Accounting Standards. Sidney: Australian Government - Department of the Senate. Gay, G. (2006). Auditing and Assurance Services in Australia. Newcastle: McGraw-Hill. Gowthorpe, C., Blake, C. (1998). Ethical issues in accounting. Grafton: Routledge. Graham, L. (2007). Internal Controls: Guidance for Private, Government, and Nonprofit Entities. Melbourne: John Wiley and Sons. Greite, S. (2007). The Development of the Australian Accounting Standards; After the End of the G4+. Victoria: GRIN Verlag. Greuning, H. (2001). International accounting standards: a practical guide. Sidney: World Bank Publications. Gross, M.J. (2010). Financial and Accounting Guide for Not-for-Profit Organizations. Melbourne: John Wiley and Sons. Hightower, R. (2008). Internal Controls Policies and Procedures. Melbourne: John Wiley and Sons. Hoffman, M. (1996). The ethics of accounting and finance: trust, responsibility, and control. Tasmania: Greenwood Publishing Group. Kwok, B.K.B. (2005). Accounting irregularities in financial statements: a definitive guide for litigators, auditors, and fraud investigators. Sidney: Gower Publishing, Ltd. Martin, R.E. (2006). Managerial Cost Accounting Practices: Leadership and Internal Controls is Key to Successful Implementation. Victoria: DIANE Publishing. McMillan, E.J. (2010). Not-for-Profit Accounting, Tax, and Reporting Requirements. Melbourne: John Wiley and Sons. Moeller, R.R. (2009). Brink's Modern Internal Auditing: A Common Body of Knowledge. Melbourne: John Wiley and Sons. Porter, B., Hatherly, D. Simon, J. (2008). Principles of External Auditing. Victoria: Wiley. Puttick, G., Esch, S., Kana, S. (2008). The Principles and Practice of Auditing. Greater Hobart: Juta and Company Ltd. Read More