Internal control is a specific procedure within the accounting system that ensures the realization of the objectives and goals of an organization. This procedure ensures reasonable assurance to the many procedures. The division into parts ensures transparency in the organization. It is worth noting that there sometimes can be limitations. These limitations include are listed below.
Employees can circumvent the accounting system to their advantage. This is especially true for a company whose procedures the employees have learned over time. It is worse where the accounting controls have not had a reshuffle, or such a policy does not exist. This means that the company employees can get comfortable and easily want to beat the company requirements. In the case, of ABC Company, the employees whose mandate is the payment of insurance may have seen a loophole that they easily took advantage of. The 500USD that was meant for that had been paid and not accounted for is a glaring loophole. The accounting department can account for money to channel to that function. The fact that it has already been paid for means it will find its way to their pockets.
Employees at ABC Company may be unqualified. The fact that this simple accounting mistake has gone unnoticed for over 9 months means that the whole department is either unqualified, careless or simply compromised. This is a big problem of the internal control measure. Employees may have mistakes emanating from judgment or personal factors. The company’s accounting department needs to be trained so as they can understand simple procedures. This training will keep them abreast with what is expected of them in the department.
Lack of Realization of Goals and Objectives
Internal controls are expensive. The company should comply with the government regulations and develop a system that is hard to cheat. This process may be counterproductive as the employees may feel as if they are been smothered. At the same time, it may shift attention from more important matters such as the realization of corporate social responsibility, growth of sales, and employee motivation. In the long run, this will hurt the company in terms of revenue growth.
Examples of Internal Control Procedures
There should be a separation of handlers of money and the accounting department. For example, the person who does bank reconciliation should not be a member of the accounting department. This means he will not be directly involved with cash making it hard to engage in unorthodox practices. Any cashier within an organization should not also be the one who records the transactions. These separation procedures, although they may be circumvented, ensure that a person cannot be in a position to steal from the company alone.
IT Security and Management Reviews
The company may employ security of cameras to monitor the activities of their employees on a timely basis. This ensures that they cannot engage in anything fishy as they are been watched. The management should do constant reviews of reports presented to it by the accounting department. This will go a long way to align the objectives and goals of a firm with the reports at hand and to identify any mistakes that the reports may have. These reviews include internal auditing that is commissioned by the management to verify the completeness and truthfulness of the accounting results.
Symptoms of Lack of Internal Control
Misappropriation of Funds
ABC Company is a classic example of how lack of internal control leads to lost funds. The 500 dollars lost for three months is a setback and it begs the question of how much has been lost in those circumstances. This may lead to a lack of realization of organizational goals.
The company faces cases of missing documents, incomplete journal entries, and commission and omission errors. There may be cases of tampered balance sheets and in extreme cases glaring frauds.
The company may be at fault if it offers a conducive environment for fraud. ABC Company may have done that. Lack of procedures that make it hard for an individual to commit fraud is a symptom of future cheating. This includes segregation of work, reviews, and IT security among others.
Impact of Missing Journal Entry
Statement of Financial Position
The ripple effect of the skipped journal entry will be felt far and wide. This includes the balance sheet which will reflect lesser than the expected financial position of ABC Company. Insurance paid is an expense. Hence, it reduces the profits accrued for a particular financial period which in essence reduces the capital base. Hence, both sides of the balance sheet are affected.
Statement of Financial Performance
Putting into consideration the fact that prepaid insurance is revenue, the lack of that journal entry will have a direct impact on it. It will decrease revenues and increase expenses hence reducing the number of profits the company is should realize. The insurance account of the company will also have disparities with the insurance company’s books of account and may need reconciliation.