a) You are required to explain management objectives that an internal control system (ICS) can help management achieve.
- An ICS enables management to carry out the business in an orderly and efficient manner. Internal controls lay out the various procedures to be followed in conducting the affairs of the organisation. E.g. there will be procedures laying out the procedures to be followed in procuring raw materials to ensure that only necessary materials are procured which meet the quality standards of the company;
- An ICS ensures that the various policies that have been put in place are adhered to by employees in running the operations of the company;
- An ICS helps in safeguard the company‘s assets. Some controls are designed specifically to ensure the assets of the company are protected from theft, destruction and that they are used in the best interest of the company. This can either be directly through physical locking up or indirectly through recording. It includes assessing assets and ensuring that any access is authorised.
- ICS help in ensuring completeness and accuracy of the records maintained. The company‘s Act requires that the management of a company keep proper books of accounts. These records are the basis for the preparation of the financial statements.
- Strong internal controls help in preventing and detecting errors and frauds. The responsibility for the prevention and detection of fraud and error rests with management. This is achieved through the implementation and continuous operation of an adequate system of internal controls. Such a system reduces but does not eliminate the possibility of fraud and error.
b) You are required to discuss five control objectives that an internal control system over sales aims to achieve.
- To ensure that the company only sells to credit worthy customers. This is aimed at reducing the risk of selling to un credit worthy customers resulting in bad debt losses;
- To ensure that all sales made to customers are subsequently billed and recorded in the ledger;
- To ensure that all sales made are recorded in the correct financial period;
- To ensure that sales are billed at the approved selling prices;
- To follow up on payments from customers and ensure that customers are adhering to the approved terms of credit;
- To ensure that there is proper control and authorisation of bad debts write offs
c) Inherent limitations of an internal control system
- Management has to ensure that the benefits expected from an internal control system outweigh the costs. As a result certain important controls might not be put in place due to the costs involved. E.g. a small entity might not have the resources to employ sufficient staff to ensure proper segregation of duties.
- Most internal controls tend to be directed towards routine transactions rather than non-routine transactions. This leaves gaps that can be exploited because the non-routine transactions will not be subjected to appropriate controls.
- Human error due to carelessness, distraction, mistakes of judgment and misunderstanding instructions could undermine the effectiveness of the internal control system.
- A member of management or an employee could circumvent controls through collusion with persons outside or inside the entity. E.g. where duties are segregated the employees could collude to perpetrate and conceal a fraud. Such collusion will render the segregation of duties ineffective.
- Abuse of responsibility e.g. a member of management overriding an internal control
- The possibility that procedures maybe inadequate due to changes in conditions
Wilfykil answered the question on February 22, 2019 at 06:17
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