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Internal Control System: Limitations, Procedures, Symptoms of Lack

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Internal Control System: Limitations, Procedures, Symptoms of Lack

Limitations of an internal control system

The core purpose of an internal accounting system (ICS) is to preventing tampering of accounting data. The ICS guarantees that the financial data is accurate, reliable and timely. Therefore, an ICS denotes procedures utilized to ensure that no misrepresentation occurs in the financial records. The institution of the above system depends on the administration and the accounting department. Notably, the institution of an effective ICS ensures that the information in the records is complete, accurate, and reliable. This is an aspect that the auditor examines while undertaking any audit. The auditor examines the ICS enabling him/her to determine whether to rely on the records generated by the organization. Despite the critical role of an ICS, it is imperative to realize that such a system is prone to collusion. Thus, an ICS has several limitations. Below is an explanation of the limitations of an ICS (Chorafas, 2001).

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If the management mis-communicates the objective of an ICS, then the employees will feel mistrusted. Consequently, it is imperative for the management to inform the work force of the purpose of the ICS. The management should inform employees about the ICS to ensure reliability of records. Additionally, the system provides a means of tackling error in accounting statements. Accordingly, the management must guarantee that employees receive proper education on how to apply the system in recording. This will ensure that employees embrace the ICS. If the employees fail to embrace the system, then the organization will fail to benefit from the ICS effectively (Chorafas, 2001).

The accounting department has a core task in the enactment of such a system. Subsequently, employees of such department recognize the weaknesses of the ICS. Such employees can easily evade the required procedures in order to execute fraudulent transactions. Moreover, the management can also evade the required procedures in recording of an entity’s undertakings. Hence, these employees can execute fraudulent transactions and elude any discovery. Despite institution of a system that seeks to ensure the integrity of records, certain employees have the capability to execute illegal transactions (Chorafas, 2001).

Management’s stance towards the system will also influence on adherence to the ICS. The management provides overall guidance consequently; if they decline to adhere to the ICS then junior employees will display a similar attitude. This will lead to the failure of the entire ICS. However, it is imperative to integrate the views of all organization stakeholders in enacting an ICS hence, averting such limitations (Chorafas, 2001).

Internal control procedures

Authorization

Authorization is an example of an ICS procedure. Authorization implies that certain actions in an organization demand approval from a certain level of management. This ensures employees cannot sanction activities that they will not bear responsibility. Authorization also ensures that no single individual can institute certain activities in an entity independently. Subsequently, employees have to consult higher authority. This makes it challenging to enter unscrupulous transactions. The implementation of this control procedure involves vesting power to different people. Additionally, at least two individuals should approve crucial transactions. This will ensure that there is no abuse of authority (Chorafas, 2001).

Bank reconciliation

This procedure seeks to reconcile all payments and receipts in an entity. The accountant commences by obtaining a bank balance. Secondly, the accountant accesses the cash in the entity. Then he/she commences reconciling the two balances by posting payments and receipts not reflected in the bank. Furthermore, there is an entry of receipts and payment that were absent in the cash account (Chorafas, 2001).

Identify symptoms of a lack of internal control

The lack of internal control has multiple consequences on an entity. First, the records at the entity are unreliable. Unreliability means that the entity’s statements lack certain traits. The traits include accuracy, totality and error free. A proper ICS guarantees reliability of records by ensuring precision and completeness statements. Consequently, any auditor who may undertake auditing in an entity without ICS would avoid reliance on records emanating from such an organization. Records of such an entity fail to adhere to accounting standards or any guiding legislation such the company act. Therefore, the basis assumed by such accounts may contrast to the legal standards mandatory as per the law. The absence of an ICS means that employees may fail to record the transactions of an entity appropriately. Thus, it is easy for employees to perpetrate fraud in such organization since there is no authorization or other checks. Such checks would ensure sound recording that would culminate in discovery of illegal transaction. The ultimate sign of lack of an ICS is a qualified report for a corporate entity. The qualification of financial reports signifies the failure of accounting in an entity. Although qualification may result from other causes apart from failure in accounting but in most instances, it reflects the failure of accounting that predominantly attributable to absence an ICS. The major implication of absence of ICS is poor preparation of records (Chorafas, 2001).

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Implication of a missing ledge entry

The implications of missing ledge entry in the statements would be multiple. First, the derived figures would be misleading. The derived figures such as net profit and gross income would not reflect the actual state of affairs since there is a missing entry. Additionally, the balance sheet may balance or fail to balance. If the transaction omission was in totality, the balance sheet may balance. Nevertheless, where there was only execution of a single entry then the balance sheet may fail to balance (Chorafas, 2001). The failure to record the insurance amounts will results in a wrong prepaid balance in the balance sheet. Additionally, this item requires an adjusting entry to ensure suitable insurance charge to the income statements. Therefore, the balance sheet and income statements will be inaccurate.

References

Chorafas, D. (2001). Implementing and auditing the internal control system. New York, NY: Palgrave Macmillan.

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