Internal Accounting Control Critical Analysis

Question: Discuss about theInternal Accounting Control for Critical Analysis. Answer: Introduction This article refers to internal control in respect of audit program so far AICPA Employees Benefit Plan Audit Center is concerned. The body had framed the guideline to help the upcoming professionals as a sponsor of the plan or administrator or trustee. The basic features to be highlighted for considerations are to emphasize on the issues of implementing plans of internal control over financial reporting. The main features to be discussed are: Need of internal control to this plan Fundamentals of internal control Monitoring the control measures To identify the deficiencies of internal control from the auditor communication and respective plan Foundation of cost effective internal control Way of improvement of effectiveness of plan related to internal control by auditor Search for additional information related to effective internal control Additionally this article will feature helpful instances of control to establish the plan. Definition of Internal Accounting Controls To define internal accounting control of any organization we have to identify its needs and scopes for the better performance of the organization so far transparency and effectiveness related to financial accounting is concerned. Internal accounting control contains several methods or processes which are put in system by the management of any company in order to confirm the integrity of information pertains to financial and accounting, to achieve targets related to operation and profitability with forwarding the mission of the management regarding policies. The best possible practice of internal control is ensured when the same is applied to different divisions and departments of any organization with common objective of the organization. There are different systems of internal control which are not identical in nature and application although many basic philosophies are there related to financial integrity and accounting practices with standard management practices(Investopedia, 201 5). Components of Internal Control System The components of internal control framework are specified by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) InternalControl- Integrated Framework, published in 1992. The same had emphasized on five basic components: The Control Environment Control environment is basically depending upon several in-house factors and working practices of the organization. These factors endorse integrity and ethical values, commitment for competency, attitude of Board and Audit Committee, style of operation and philosophy of management, structure of the organization, and delegation structure of the organization related to authority and policies and practices of human resource management of the company. Risk Assessment Risk assessment is related to audit and client management. While client management risk control can be mitigated by reducing errors and frauds, audit management is properly practiced through identification of inherent risk, control risk and detections risk(Energy, 2016). Control Activities Control activities are depending upon proper implementations of systems highlighting the areas of sufficient division of duties, delegation of authority related to transactions and respective operations, sufficient documentation with records, proper control on assets and respective records physically with self-governing checks on activities. Information and Communication Information plays a vital role in todays business world. Information is consisting of MIS and accounting system. Hence proper monitoring of information is priority for the management transparent communication makes it easy for practicing proper internal control so far accounting is concerned. Monitoring Monitoring of internal control is possible through internal audit system implemented effectively. To ensure proper monitoring of internal accounting control independent internal audit is the priority and demand of the situation. It is desirable that internal audit management should act independently relating to operation of accounting activities. This can be ensured through the reporting of internal audit team to higher authority in the capacity of board of directors or audit committee(JSU, 2015). Examples of Internal Control Examples of internal accounting control are given below: Implementation of system of checks and balances to confirm single authority to exercise control over respective fields of financial transactions Reconciliation of relevant bank account periodically with special emphasis of instruments due for clearance for both payment and receipts Restriction of credit card users with specification of limits and the purpose of spending. Monitoring of budget vs. expense analysis of the organization to control over spending. Fixation of monetary policies of the organization and make it in black and white with approval of Board of Directors Physical checking and monitoring of assets periodically with the notice of normal wear and tear and existence of those physically Protection of cash in the form of petty cash and other cash funds through effective cash management Strict policy towards issuance of financial instruments in the form of checks. To ensure avoidance of transactions with the parties of conflict of interest(OHM, 2015). Benefits of Internal Control in Business There are certain advantages of practicing internal accounting control by the management to ascertain smooth running of the business with integrity and ethics. The following points can be considered as the merits of practicing internal accounting control within the organization: The system of internal accounting control facilitates the system of protecting the assets from the bad impacts of misuse. Accident, theft etc. This system also ensures the implementation of management policies for accomplishment of corporate objectives. Proper system of internal accounting control facilitates the role of auditor to act as watch dog related to financial and accounting system of any organization by ensuring detection of intentional and unintentional mistakes in the form of frauds and errors in the financial accounting system(Aicpa, 2015). This system enhances the scope of controlling the integrity of the organization by way of reliability with accuracy related to financial statement and the respective record covered under the books of accounts. This system emphasizes on the role of HR so far their work is concerned with the division of work with proper level of delegation of authority bestowed to ensure proper smooth work on daily basis. Proper implementation of internal accounting control can ensure preparation and implementation of effective and systematic plans to confirm correctness of information. Internal control also plays the role of alarming the staff to ensure correctness of the work in respect of accounting(Accountlearning, 2016). Limitation of Internal Accounting Control As for other controls practiced in the business system, internal accounting control also faces some limitations. These limitations are mainly related to cost effectiveness. The main objective of the system of internal control is to ensure correctness of the financial accounting system with the help of systems implemented and with the available human resources in the operation of accounting. There are different process of internal control prevalent in the accounting and financial management of the organization. While big companies are insisting on the application of strong internal audit team headed by audit committee, small companies are insisting on strong MIS with standardized accounting software(Hill, 2014). Cost of implementation of a specific control system should not exceed the anticipated benefit of thecontrol process. It is one of the basic concepts for the implementation of control system. As human being is involved in the process of executing the job and implementing control, it is always to ensure that the situation should not drive them towards any unethical situation(Libin, 2015). The ultimate objective of strong internal control is to reduce three types audit risks- inherent, control and detection. While all these risks are related to material misstatement due to different reasons like intentional and unintentional errors. While inherent risk is related to unintentional error, control risk is detected as concept of fraud or misstatement due to lack of control. To avoid such happening, internal control is being practiced. Still if its there, there is no use of practicing the same. Internal accounting control can have it limitation by the application while the material misstatement happens and this requires regular survey to find new scope of fraudulent activities by the person concerned by avoiding the existing scope of internal control(K-state, 2015). Real Cases Real cases of practice of internal control and its limitations can be found in case of resignation of KPMG as official auditor of FIFA as they could not stop the corruption of the world football body in spite of their best efforts. Toshiba had faced such occurrence in 2015 when they were accused with massive accounting scandal and this erased the importance of internal control in such big MNC(Toshiba, 2015). The involvement of top level management flouting the norms of internal control had been observed in case China Essence Group where the CEO was involved in the process of manipulating stocks(Agnew, 2016). Conclusion None can deny the role of internal accounting control and it is evident that it can play a vital role for the healthy and ethical operation of any organization. It is most important to place the proper system of internal accounting control to ensure the integrity and professionalism of the company and it should be practiced at all levels of the organization. This can ensure the best possible operation of the company through proper delegation of authority to be practiced even if some efforts of misconduct can be initiated by some people in the organization. References: Accountlearning, 2016. Concept Of Internal Control And Its Advantages. [Online] Available at: https://accountlearning.in/2012/02/concept-of-internal-control-and-its.html [Accessed 10 November 2016]. Agnew, H., 2016. KPMG Switzerland resigns as Fifa auditor. [Online] [Accessed 10 November 2016]. Aicpa, 2015. The Importance of Internal Control in Financial Reporting and Safeguarding Plan Assets. [Online] [Accessed 10 November 2016]. Energy, 2016. Internal Control Evaluations. [Online] Available at: https://energy.gov/sites/prod/files/2016/04/f30/ICGuidance2016.pdf [Accessed 10 November 2016]. Hill, R., 2014. Limitations of Internal Control in Financial Reporting. [Online] Available at: https://study.com/academy/lesson/limitations-of-internal-control.html [Accessed 10 November 2016]. Investopedia, 2015. Internal Controls. [Online] Available at: https://www.investopedia.com/terms/i/internalcontrols.asp [Accessed 15 November 2016]. JSU, 2015. Section 404 Audits of Internal Control and Control Risk. [Online] Available at: www.jsu.edu/ccba/fea/faculty/zanzig/477/477_10.ppt [Accessed 10 November 2016]. K-state, 2015. Internal Control Limitations. [Online] Available at: https://www.k-state.edu/internalaudit/internal-controls/limitations.html [Accessed 10 November 2016]. Libin, Z., 2015. Troubled China Essence unable to file Q2 results. [Online] [Accessed 10 November 2016]. OHM, 2015. Top Ten Internal Controls to Prevent And Detect Fraud! [Online] Available at: https://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html [Accessed 10 November 2016]. Toshiba, 2015. Toshibas accounts. [Online] [Accessed 10 November 2016].