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Free Essay Sample «Internal Control System»

«Internal Control System»


Internal control refers to processes designed to ensure compliance with the reliable financial reporting. It enables a company to safeguard its assets such as cash from unauthorized persons, theft, misuse, and misappropriation (Basit, 2008). This paper seeks to analyze various scenarios of internal control adopted by different organizations in chapter four of the text.  

Scenario E4-5

Weaknesses of internal control over cash disbursement

The scenario E4-5 about the internal control of Idaho Company has the following weaknesses that need to be addressed.

  1. The checks are not numbered in advance.
  2. Checks are signed by either the treasurer or the purchasing agent
  3. The checks are not compared to invoices and neither.
  4. The bank statement is not reconciled at all.
  5. Blank checks are not stored in safes and do not have limited access since it is kept by the treasurer
  6. The persons signing checks are the same persons making the disbursements.

B) Memorandum to the management

The internal control of the business over cash disbursement is not effective enough to help guard against loss of cash. In order to improve the procedures, the business should establish responsibility so that only specified personnel are allowed to sign check, for example the treasurer. Secondly, duties should be segregated. In this case, different persons should be involved in the approval and payment of money. Thus, persons signing checks should be different from persons recording the payments (Zameer & Khalid, 2009).

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Third, the process of documentation should be well outlined. Thus, checks should be prenumbered and accounted for in sequence. Each check should be accompanied with an approved invoice and the invoices should be stamped when payments are made. Fourth, there should be a system of mechanical, electronic, and physical control of cash disbursements. Blank checks should be stored in safes and accessing them should be restricted. Finally, an independent internal verification should be established such that the invoices are compared against checks. In addition, the bank statement should be reconciled regularly with the cashbook.

Scenario P4-1A

The principles of internal control practiced by Guard Dog Company include the principle of segregation of duties, proper authorization and verification, adequate documentation and recording and physical control. For example, all the checks are pre-numbered and are prepared by check writer. At least three persons sign all checks and when payments are made, the invoice is stamped ‘paid’ and later taken to the accounting department for recording. The bank statement is also reconciled on monthly basis. The checks are stored in the safes and can only be accessed by the treasurer and the assistant treasurer (Akif, 2008). This is an example of a well-designed internal control that the company uses to safeguard cash disbursements.

Scenario p4-2A

(a) The weaknesses in the internal accounting control in the handling of cash for are:

  i. The responsibility of counting cash collected is in the hands of one person, the head usher.

  1. The amount of cash withheld by the secretary is not fixed.
  2. The financial secretary performs multiple of tasks related to handling of cash.
  3. The church safe is easily accessible and the amount recorded by the head usher can easily be altered.
  4. There is lack of independent internal control.

(b) The improvements I intend to make for this department include:

  i. At least two ushers and the financial secretary should be involved in the counting of collections, which should be recorded and signed by the three.

  1. Responsibilities and activities should be separated so that no single person should perform two related duties.
  2. The amount of cash to be retained should be fixed so that it is not left at the discretion of the financial secretary.
  3. Verification should be made by independent person periodically or by surprise.
  4. The volunteer ushers should be persons exhibiting high degree of honesty and integrity.
  5. At least one member of the financial committee should be involved in the record keeping or collections. The committee should possess high degree of professionalism in exercising their responsibilities.

(c) In general, the church should change policies dealing with the appointment of ushers, the collection of cash, the counting of cash, record keeping, and duplication of roles and authorization of expenditures.

Principles of cash management

The five basic principles of cash management are increasing the speed of collection of accounts receivable, keeping the level of inventory low, delaying payment of liabilities, planning the timing of major expenditures and investing the idle cash. Any company, to increase its accuracy and efficiency, can use these principles. Increased accuracy ensures that the business remains financially sound and stable. There are several ways of ensuring accuracy using these principles.

Receivables are money owed to the business by the customers. Such money is not available for use when required. Increased collection by such means as cash discounts for early payment ensures that the business does not lose to competitor. At the same time, the business increases its cash holdings, which can be used to finance business operations (Rezaee, 2002). This will be beneficial to the company hence improvement of its accuracy. In addition, low levels of stock maintained by the business reduce the cash tied up in stock thus availing cash for business operations. More space is also availed in the business. At the same time, the risk of holding stock is reduced. These will boost the accuracy of the business.

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Delay in payment of liabilities should be encouraged in the business. Liabilities should be paid when they mature otherwise earlier payment would mean lose of cash that would have been used to boost the business. On the other hand, liabilities should not be paid after the expiry period because this would reduce the credit rating. Timely payment of liabilities leads to conservation of cash that is important for achieving efficiency and accuracy in the business.

Major expenditures should be timed such that the business only incurs them when there are sufficient funds. When such expenditures are not planned, it may cause the business to suffer financial problems. Therefore, the business should only make major expenditures after careful planning based on the availability of cash (Zameer et. al., 2009). This is useful in achieving efficiency and accuracy of the business. In addition, idle cash should not be invested because idle cash does not earn anything to the business. However, the investments should be majorly in liquid form to avoid cash crisis in the business. The liquid investments should earn more cash interest that will help boost the financial base.



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