Internal controls are important in firms’ financial business strategies and procedures. These controls protect the firm’s resources from misuse, fraud, and disorganization while guaranteeing accuracy and consistency in accounting, and assessing the level of performance in organization’s operations. This paper focuses on the limitations of internal control systems and procedures of formulating internal controls. The paper seeks to educate ABC Company on the need to implement effective internal control system.
According to Moeller (2006), the limitations of internal control include collusion, lack of management support, and lack of training and communication. In collusion, some accounting personnel conspire to con the business and they formulate methods of controlling the established control system. These employees may be in the same department and work with the same financial information. They may change passwords that allow them to access and control the system’s information while creating forged transactions to take the firms money without the knowledge of others. This can be possible especially if it involves senior management who approves one another’s’ transactions.
Lack of training and proper communication is another factor to the internal control. Some employees may not understand the use of internal control and hence they may fail to follow procedures. It is the management’s duty to train the employees, or to assign other employees who know how to apply the internal controls. If the training is not done employees might feel overworked and follow other procedures, or divert while ignoring the correct system.
Lack of management support is another limitation because if managers do not support employees to use the internal control system, they may limit the use of the system. Employees may override some work without the managers checking why a particular transaction was overruled and this might lead to fake transactions.
In this regard, fraud prevention in the company is an example of internal control procedure. In this procedure, the management can ensure that one employee does not complete all the accounting transactions, such as reconciling bank statements transaction because he/she may engage in fraud and steal money from the company. Porter (2003) argues that it is important for employees, especially those who deal with signing of cheques and other transactions to take vacations. It is easy to spot any frauds when another person takes over. In addition, use of pre-numbered documents minimizes cases of issuing false documents.
Another internal control procedure is verification of data. Internal controls verify the company’s accounting data. All information about transaction is recorded correctly through a well-structured review. Accounting managers review employees accounting task in weekly basis to ensure that they are correct and up to date. Accounting workflow procedure ensures that employees handles incoming and outgoing accounting documents or information in a consistent manner. Similarly, accounting workflows enable internal auditors to handle financial documents and how to documents the record of accounts after the information is entered into the company’s ledger (Moeller, 2006).
However, Morley (2008) asserts that the symptoms of lack of internal control are the lack of accountability on accounts receivables. When many people handle financial transactions, especially the accounts receivables, which are supposed to be handled by the management, there is the possibility of cases of fraud in a company.
In petty cash, there are no details of expenditure of money and the remaining balances are not recorded or entered. When there is no evidence that goods the company’s products were procured at a certain date, no creative invoices, and no proofs that purchase deal was properly authorized, it is shows that there is no internal control. The cheque signing and distribution are not properly handled and this leads to theft. Moreover, misappropriation of funds and false reports also proofs that there are no controls which makes the management to have inadvertent errors which causes reporting problems,
Additionally, journal entry is an important concept in the management of financial statement. A journal shows accounting transactions which occurs on daily basis. The journal entry requires that transactions be recorded on both sides of the statement in a view of ensuring that business operations are genuine and consistent; order and date of occurrence must be recorded. When a journal entry is missing, it is difficult to tell how transactions occurred. The auditor will not be able to know the date that a transaction occurred and the particulars of transactions, the receipt numbers and the voucher number because there are no proofs to enable him to interpret the transaction. There is also likelihood to make mistakes, especially when writing a ledger.
In conclusion, internal control of transactions is essential in a company because accurate information allows the management to make better decisions. Improper interpretation of transaction and wrong reports is considered fraud and might cause problems. Internal controls should be tested periodically to ensure that there are sufficient safeguards. These controls systems will reduce the costs, which are related to poor decision making and will make a clear balance of both administrative and accounting control. Both internal and external auditors should be hired to ensure higher profitability of the company.
Morley, P. (2008). Guidelines for Internal Control Standards. London: Plexus Publishing Limited.
Porter, A. G. (2003). The Impact of Internal Controls. Cambridge: Harvard University Press.
Moeller, R. (2006). Modern Internal Auditing: A Common Body of Knowledge. New York: McGraw Hill.