Daley Co
Component of Internal Control Description
1- Control Environment Control Environment includes the
governance and management
function, attitudes, awareness and
actions of those charged with
governance and management
concerning internal controls and its
importance in its entity. Control
environment sets the tone of an
organization by influencing the control
consciousness of its people.
2- Risk Assessment Process Risk Assessment process includes how
management identifies the business
risk relating the presentation of
financial system and applicable
financial reporting framework. It
determines the significance, likelihood
of occurrence, and how management
manage and result thereof.
3- Control Activities Control activities include the
procedure and policies used to verify
that how management directive are
carried out. Control activities are
carried out in information technology
and manual system for objectives at
organizational and functional level.
4- Monitoring of Internal Controls Monitoring of internal control involves
the process and procedures to assess
the effectiveness of internal control on
a timely basis. Monitoring of internal
control involves assessing the internal
control on a timely basis and taking
necessary remedial actions.
5- Information System For the purpose of financial reporting
information system includes
accounting system designed to initiate,
process, record transaction of entity to
give accountability on related assets,
liabilities and equity.
b)
Weaknesses Recommendation Test of Control
No checks over the Checks on the system Ask for the sample of
transfer of hours worked should be performed transfer report and
to the payroll system. regularly and it should be ensure it is signed and
This causes an increased reviewed and signed by reviewed by responsible
risk of error because responsible official so official.
system may transfer that any error spotted
incorrect hours leading can be reported on time.
to over and under
payment to employees
which can cause
increased employees
dissatisfaction.
An edit report of the Payroll data should not Ask for the recent
amendments is not be amend by the clerk if amendment report and
reviewed. so than it should be ensure that it is signed
It can lead to increased reviewed and signed by by the senior official.
chances of error because the senior official.
there might be some
system fault.
The finance director The Finance director Ask for the sample of
reviews the total amount should review the bank payment list and
of bank payment list and individual transactions see if the all transactions
authorize it. despite of just looking at are reviewed by the
It leads to increased risk the total and if there is finance director and
of supplier dissatisfaction an error found it should signed.
because any individual be timely corrected.
transaction might be
incorrectly treated will
lead to over and under
payment to supplier
which can also lead to
loss for the company.
Staff member return the Ensure that the Ask for the sample of
excess money but there employees submit the petty cash voucher and
is no requirement for receipt against the petty ensure receipts are
receipts to be provided. cash vouchers. attached with it.
It will lead to increased
risk of fraud because
staff will use money for
themselves in the name
of sundry expenses or
can steal money that left
in excess.
Cashier reconcile the Reconciliation should be Ask for the recent
current account after one performed on regular reconciliation report an
month and the basis so that if there is ensure that it is
remaining three bank any error identified it authorized and signed by
accounts after three should be reported and the finance director.
months. resolved.
It will lead to increased
risk of error leading to
bad impact on companys
goodwill because if the
error are not identified
on timely basis an wrong
payment to supplier will
lead to los of goodwill.
c)
Weakness Recommendations
1-Fred Johnson who is the chief Fred should resign from board of
executive of the company become the chairman and independent person
chairman of board. should be hired by the nomination
There should be clear division between committee.
running the company and running the
board and individual must not misuse
its power.
2-Questions could be raised at AGM should be called if there is a
company's AGM and other serious issue and a communication
communication with the board is not department should be set up to anwer
allowed. the shareholder's questions.
This could result in loss of shareholders
and goodwill.
3-Non executive directors' salaries are Non-executive director salaries should
based on pre-tax profit targets. be according to their time and skill.
This could impact the independence of
director due to fear of a decrease in
salary.
WHITTAKER
a)
1- Amount exposed to deficiencies.
2- Volume of activity that has occurred or could occurred.
3- Importance of controls to the financial reporting process.
4- The cause of frequency of expectation identified as a result of deficiencies.
b)
Direct Controls Test of Control
1- The system generates the credit Ask for the evidences against the
limit for each new customer sample of customers to ensure that
which the sales director customers are approved before they
approves before the customer place order.
can place any order.
This ensure that the only legit
customers are given goods on
credit to reduce the risk of bad
debt.
2- Clerk reviews the outstanding Ask for the recent aged receivables
debt in the aged receivables report and credit control department
report and any debt greater call log so that it can be confirmed that
than 30 days overdue are then customer older than 30 days are
passed to credit control contacted after 30 days.
department which contacts the
customer to solve the issue and
recover debt.
This ensures that if there is an
customer who didn’t pay for
more than 30 days is contacted
and ask them to pay the debt so
that there is smooth flow of
cash.
3- The accounts clerk reconcile Ask for the recent reconciliation report
receivable and individual and ensure that it is reviewed and
balances and erros are corrected signed by the financial controller.
on timely basis, reviewed and
approved by the financial
controller.
This ensures that if there is any
error spotted it can be corrected
on timely basis so that there is
no negative impact on goodwill.
c)
Control Deficiency Control Recommendation
1-Joiners forms are not completed and Joiners forms should be completed for
instead, the production supervisor every new employee and it should be
notifies the payroll department on the reviewed and signed by the senior
day of employment commencement. official.
This can lead to increased risk of fraud
because production can send fake
emails and fake salaries will be
processed by the payroll department
leading to company loss.
2- Overtime report is reviewed on a Overtime reports should be reviewed
quarterly basis after the overtime regularly so that if any error identified
payment has been made. can be reported on timely basis and
This leads to increased risk of error after review overtime payments should
and employees dissatisfaction because be made to employees.
any error in the overtime report can
lead to over and under payment to
employees.
3-No checks are performed at monthly Payroll sheet should be reviewed by
payroll calculation. the senior official so that if there is any
This increases the employee's mistake it can be corrected on timely
dissatisfaction because any error in the basis.
payroll calculation can lead to over and
under payment to employees.
4-Login details including passwords are All login details should be kept in a
saved in a shared file which is secure vault and access to the vault
accessible to all payable ledgers staff should be given only to the responsible
and accounts department. official so that no one can access the
This leads to increased of theft of file easily.
money from the bank account because
anyone in the accounts department
can access the bank account via the
login details in the file which will lead
to huge loss of company.
5-Financial Controller only investigates All amounts irrespective of there
the reconciling items if the sum of significance should be investigated so
these item is significant. that no one can try to do fraud in
This can lead to increased risk of fraud smaller amounts also.
because if anyone wants to commit
fraud he will do in small amounts so
that it can't be investigated by the
financial controller.
POMERANIAN
B)
Control Deficiency Control Recommendation
1-Copies of GDNs are sent to the sales GDNs should be timely sent to the
ordering department and finance sales ordering department so that they
department on the weekly basis. can update the system which item is
This will lead to an increased risk of present in the inventory and which
customer dissatisfaction because the item is not.
sales department could take the orders
for those items that aren't present in
the warehouse due to not updating
the inventory record on timely basis
2-The reconciliations is only reviewed Reconciliation should be reviewed and
by the financial controller if there are signed by the financial controller so
unreconciled differences. that if there is any misstatement it can
This will lead to an increased risk of be timely dealt with.
fraud because clerk might be involved
in the fraud and not reconciling the
balances correctly so that financial
statement don’t investigate the
difference.
3-Board approval is required for any All additions irrespective of the limit
asset costing 0.5m .Asset expenditure should be authorized by the board so
below this level can be authorized by that risk of any fraud can be reduced.
the relevant head of department.
This will lead to increased risk of fraud
because head of department might
involved in the fraud and doing fraud
below the 0.5m so that they don’t
have to take board approval.
4-Internal Audit department have only Inventory count should be done at all
complete the comparison at one warehouse by an independent person
factory and one warehouse. so that assets in the non current asset
This will lead to misstatement about register can be verified.
the noncurrent asset because no
counting has been performed at other
warehouses and of there has been any
asset stolen it cant be identified.
5-Warehouse managers are An independent person should be
responsible for supervising the hired or internal audit department
inventory count at their sites. should do inventory count so that if
This will lead to increased risk of Fraud there is an any fraud it can be timely
because warehouse manager might be identified and reported.
involved in doing the fraud and if he is
involved he will not disclose the
correct counting for inventory.
6-The basis of standard cost was Standard cost should be reviewed
reviewed by the production regularly so that reasonable provisions
department approximately 2 years can be made and no error pass onto
ago. the financial statements.
This will leads to error because prices
may be increased or reduced, incorrect
bugdets can be made and incorrect
provisions will be made which will
impact the financial statements.
7-All members of purchasing Access to the master file should not be
department have full access to given to all members It should be only
supplier master file data. given to the senior responsible official.
This will leads to increased risk or
breach of confidential information as
master file is very confidential file of
the company.
8-The finance clerk matches the Purchase order should be matches
invoices to the relevant purchase against the GRN so that it can be
order. ensured that company only pays for
This will only verify what we ordered what it received.
but not with what we received maybe
we received less items then it can lead
to company loss.
A)
Limitation of Internal Control:
1-There is always potential of human error.
2-Internal Control are made for routine transaction and non routine transactions
cannot be identified.
3-Internal control may lead to collision of employees
4-Management override of internal controls which can make control less effective.