Major Requirements for Company Management - Essay Example

Requirement A company's management utilizes the internal control process to ascertain the accomplishment of these three objectives viz. effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. Effectiveness and efficiency of operations refers to the achievement of basic business objectives and operational efficiency. It also includes profitability and protection of the company's assets. This exhibits that the internal control system should first of all meet the objective of accomplishing the company's operational goals and objectives. The second objective of an internal control system is to prepare a reliable and trustworthy financial reporting system. It means that the internal control process helps to ensure that the company's financial reporting i.e. the preparation of annual and interim financial statements along with the earning reports is done with utmost responsibility and integrity. Because the published financial statements go a long way in influencing the decisions of various stakeholders, it is the most crucial responsibility of internal control system to provide assurance with respect to the reliability of financial information. The third objective is to ensure that all the legal requirements as well as laws and regulations pertaining to the organization are met (Internal Control - Integrated Framework, retrieved 24.01.07). It is one of the most important responsibilities of management to ensure the fair financial reporting under GAAP. This includes the company's balance sheet, income statement and the statement of cash flows with material considerations, as mentioned in Statement on Auditing Standards (SAS) 69. The Sarbanes Oxley Act (Section 302) also requires the company's management to ensure fair reporting of financial information in the financial statements (McEnroe, 2005). Sarbanes Oxley Act (section 404) requires the management to report on the internal control with respect to financial reporting, whereas auditors need to provide their opinion on the effectiveness of internal control. This section is important to avoid any material misstatements or detect any deviations from standards. It was introduced in response to the management's lack of attention towards internal control system and its effectiveness (Weirich, Arndt and Ciesielski, 2005). The internal audit system of TPC should also meet the above mentioned objectives. The company's auditing objectives can be met with the help of a proper channel of communication which guides the audit team towards the accomplishment of these objectives. To gauge the extent to which the organization achieves these objectives, the internal control system should be combined with sufficient control tests. These tests can help TPC to check any possible deviations from the internal control system's operational, financial and regulatory objectives (Internal Control - Integrated Framework, retrieved 24.01.07). The internal auditor team should check the effectiveness and lacking of the internal control system on a regular basis so as to figure out any discrepancies and make corrections (Willis and Lightle, 2000). Reference List Internal Control - Integrated Framework. COSO: The Committee of Sponsoring Organizations of the Treadway Commission. Retrieved January 23, 2007 from the World Wide Web:http://www.coso.org/publications/executive_summary_integrated_framework.htm Willis, D.M. and Lightle, S.S. (2000). Management Reports on Internal Controls. Journal of Accountancy. Retrieved January 23, 2007 from the World Wide Web:http://www.aicpa.org/pubs/jofa/oct2000/willis.htm McEnroe, J.E. (April, 2005). Beyond GAAP: Issues Involving the Sarbanes-Oxley Certification Language, the CPA Journal, Retrieved January 26, 2007 from the World Wide http://www.nysscpa.org/cpajournal/2005/405/perspectives/p18.htm Weirich, T.R.., Arndt, T.L., Ciesielski, J.T. (Sept., 2005). Sarbanes-Oxley Act and Section 404: Basics on Internal Control Reports. The RMA Journal. Retrieved January 26, 2007 from the World Wide http://www.findarticles.com/p/articles/mi_m0ITW/is_2005_Sept/ai_n15952771/pg_1 Requirement 2: The control issues found in the procurement and payment cycle of TPC can be assessed and checked with the help of various tests. There are two types of most widely used substantive tests viz. tests of details and analytical procedures. In cases where it is not specifically workable to count and audit the whole accounting population, sampling is effectively used (Hitzig, 2004). Sampling is one of the crucial methods to effectively perform the audit of purchasing. For example, if the TPC's purchasing and procurement system needs to be audited taking into account 5000 purchase orders, the auditor should draw a sample out of the total population i.e., 5000. Sampling, however, is not the right method to be applied to the test controls because this does not guarantee that the required information and possible deviations would be necessarily obtained. This also would not provide sufficient information as to the effectiveness of control system towards the achievement of internal control objectives. For example, in the case of TPC, testing of controls would not be done effectively with the help of sampling, instead, an evaluation of whole system would be more appropriate (Hitzig, 2004). Sampling can either be statistical or non-statistical. Statistical sampling primarily utilizes statistical evaluation to determine the size of sample to be audited from the population. Non-statistical sampling, on the other hand, relies on an internal auditor's ability to manually analyze and judge the outcomes of sampling procedures based on his instinctive knowledge. The statistical sampling is done with the help of laws of probability, which provides equal chance of selection to each purchasing order (Hitzig, 2004), as in the case of TPC's audit. Statistical sampling can be very helpful in the case when the possible cause of the problem or risk is unknown and it is very difficult for the auditor to check and evaluate every single unit (Hitzig, 2004). In TPC, 5000 purchase orders are to be checked and evaluated. In this case, the statistical sampling can be very useful. The sample size to be audited could be based on a number of factors viz. time, complexity and criticality. The internal auditor should select a number of samples that could be conveniently evaluated within a limited time. The more complex a situation is, the more time it will require to be audited. An activity which is critical for the company's business processes and activities needs a larger sample size to be audited than others (Quality Management Systems Internal Auditing, 2003). TRANSACTION-RELATED AUDIT OBJECTIVE KEY INTERNAL CONTROLS COMMON TESTS OF CONTROLS COMMON SUBSTANTIVE TESTS OF TRANSACTIONS Existence/Occurrence Purchase requisition, receiving reports, and vendor invoices Examine documents for existence check matching vendor invoices with payments, check 5000 PO's totaling $45 million. Review the purchasing journal, general ledger, accounts payable tracking invoice numbers, and payment checks with posting to ensure all transactions have been posted. Completeness Vendor invoices Check the documents and ensure that they are prenumbered and accounted for. Investigate into purchase requisitions and invoices for omission of 5000 purchase orders of $45m See payment checks, transactions, general ledger and chart of accounts so as to figure out any omission. Accuracy Purchase requisition, invoice, transaction dates and entry dates Verify the documents to see if the purchase orders and invoices are accurate and timely recorded. Check the master files, entries and chart of accounts for accuracy and cash payments against vendor invoice Classification Invoices and Chart of accounts Examine these documents to see if there is any classification error. Check chart of accounts to assure classifications are correct Timing (cutoff) Invoices, Reports, transaction dares and entry dates Check these documents to find out timing and recording of 5000 purchase orders worth $45m. Inspect the purchasing order, journals, ledgers and account balances. Authorization Reports and invoices See the documents to know if the authorized persons have approved all the transactions and invoices before they are recorded. Examine the purchasing checks and posted transactions to see if transactions are properly authorized Posting and Summarization Batch totals, computer summaries, posted transactions. Analyze these documents to check the transaction postings. Compare batch totals with computer summaries to see if transactions are posted and summarized with correct batch totals. Reference List Quality Management Systems Internal Auditing (Dec, 2003). Internal Auditor. Retrieved January 23, 2007 from the World Wide Web: http://www.internal-auditor.com/Features/2003/03-12-Sample-Size.htm#feature Hitzig, N.B. (May, 2004). Statistical Sampling Revisited. The CPA Journal. Retrieved January 23, 2007 from the World Wide Web: http://www.nysscpa.org/cpajournal/2004/504/essentials/p30.htm Read More