Internal Control- A Detailed Analysis

Question: Discuss about the Report for Internal Control- A Detailed Analysis. Answer: Introduction Controls instilled within an organization so as to warrant that the business processes are conducted in the most desired manner, the financials prepared are reliable, the operations of the firm are accomplished by adopting an approach which is efficient enough to ensure that the firm is able to meet its goals and targets, the assets of the firm are protected enough to be able to safeguard from any kind of endangers and the processes are stringent enough to prevent any kind of fraudulent activities is what an internal control process promises. Unfortunately installing such procedures in a small organization may be a costly affair and the results may not be as desired. There may be situations wherein implementing such a process may be impossible[1]. In the said case it is very evident that the internal control imbibed within the Ashmore Grocery Store is weak and feeble enough to lead Kate Clarkston towards a path of losses. Thus I was requested to advise Ms. Kate Clarkston on the various internal control measures that she should follow so as to ensure that such a kind of vulnerability is wiped off. Credit (Accounts Receivable) Conducting a business on credit is a very common phenomena in the trade of retail and wholesale, specifically with regards the inventories. However to ensure that the there is no pilferage of the stock, a vigilant internal control system must be in place. The credit worthiness of the customers should be checked in detail[2]. The same should be conducted on a regular basis for both the new customers as well as the old ones as the credit worthiness may change with the changing scenarios. Further periodical follow ups for the clearance of the accounts is a must to prevent the occurrence of bad debts. The authority to grant credit to the customer should be kept by Kate herself and if any sales staff tries to grant credit on his / her judgement then the same should be questioned and dealt with immediately[3]. The next important area which requires attention is the immediate mending of the cash drawer as cash should always be kept under lock and key and adhoc withdrawals without approval should be stalled. Although there is one person responsible for the cash, yet maintaining more than one cash register also points fingers towards a weak control system. This may also lead to confusion and fraud. Thus the three registers should be discarded and only one register should be maintained which should account for all inflows and outflows of cash[4]. Credit- (Accounts Payable) Accounts payable is an equally sensitive area which requires vigilant controls, specially in a business like yours which has a very limited staff. The credit the suppliers give, the amount that they charge for the goods ,how much to order and timely negotiations with the suppliers is a must[5] .In the said scenario, Kate never took stock or inputs from its staff with regards the requirements of the goods each week and ordered in an adhoc manner. The same should be made only after proper stock taking is done. Further Kate should personally view the payments to be made to the suppliers so as to ensure prompt payments are made thus availing the benefit of cash discounts or other benefits that the suppliers offer[6]. Another very integral area of internal control which you need to inculcate is segregation of the work. The office administrator though very old employ should not be entrusted with the work of making payments to the suppliers, counting the cash, and filing of the bank statements. The work should be divided amongst the other staff also and the cash should be counted and banked by you personally. This would lead to applicability of self check process automatically[7]. The same may seem to be a costly affair to you, however if the work is delegated amongst the staff then the chances of risk and errors is minimized considerably. Inventories Inventories is another very fragile area which is prone to frauds thus daily stock taking should be made a part of the normal procedure of a business The stock taking will enable you to have an idea about the goods which are perishable in nature, the duration within which they get perished, the goods which are fast moving, goods which are no more in demand and which needs to be stopped at all. This will save your cost as well as ensure that the percentage of normal loss is minimal. Thus internal control over inventories can be instilled only if the stock is taken on a daily basis and any loss detected is immediately countered for. As the size of your business is small you may find this to be a time consuming as well as a costly affair, yet the benefits are manifolds[8]. Non-current assets Internal controls over non-current assets often takes a second seat in most of the firms which are not too big in size as their is a misconception with regards the fact that these do not hold much importance. But the said notion is incorrect. The fixed assets indirectly help in the conduct of the business and are costly assets which needs to be taken care of and maintained on a regular basis else replacement may cost huge to any entity leading to short term cash crunches as well as financial load. Thus timely maintenance and replacement of the same is the best remedy so that maximum benefits of depreciation as well as production is derived. Further a fixed asset register is a mandate for all kinds of firms[9]. In the current situation Kate uses few equipments such as an air fryer, refrigerator and bain marie which are expensive assets. She does not keep a track of the maintenance and timely repair and replacement of the same. She considers her staff to be so trustworthy that as soon as they inform her about the need for replacement of any equipment, without even checking the validity of the warranty or trying to get the same repaired she prefers to change the same immediately[10]. The same should be checked. Kate should take a note of the same and ensure a periodic AMC of the equipments installed at her shop. The equipment if under warranty should be sent to the company itself who would help to address her issues without any cost to her. Further before replacement a proper analysis of the cost of purchase versus the repair cost should be conducted and then a decision should be taken. She should have ventured into the reason for the replacement of a brand new ice cream freezer before replac ing the same as there may be chances that the same is stolen by any staff[11]. Conclusion Therefore as per my opinion Kate Clarkson should ensure adequate internal control is implemented and made a part of the system of her shop at the earliest. The top line of the firm may take a hit if adequate controls are not put in place before this leads to a larger fraud thus leaving her with no option but to shut down the business. It has to be understood that small business are more prone to inefficient systems and the staffs take the advantage of this vulnerability. Thus Ashmore Grocery Store should ensure that the above detailed measures should be adopted and made a part of its daily routine so that it can prevent profit erosion and earn profits as targeted for. References: Agarwal, V., Internal controls in a retail store,[Website]. 2015. https://www.withum.com/kc/internal-controls-retail-store/ (accessed 25 July 2016) Adams, K., Types of Internal Controls in a Grocery Store. Houston Chronicle, 25 July 2016. https://smallbusiness.chron.com/types-internal-controls-grocery-store-62145.html (accessed 25 July 2016) Cardwell, H., Principles of Audit Surveillance, R.T. Edwards Inc. USA, 2005 Frias, S.A., and Fajardo, C.L., Textbook in Auditing Theory (Assurance and related services), 4th Eds, KATHA Publishing Co. Ltd. Philippine, 2008 Geyer, J.M., The Basics of Inventory Internal Controls.; ImproMed, 15 February 2011, Accessed from https://www.impromed.com/newsletter/article.aspx?a=227 (25 July 2016) Horngren, C. Et al. Accounting, 7th Eds. Pearson, Australia, 2013 Hightower, R. Accounts Receivable- Cash Application, John Wiley Sons Inc., 2015, Available from E-book library (Accessed 25 July 2016) Internal Control: A Practical Guide, KPMG, UK, Service Print Limited , 1999 Long, M.M., Internal Controls for Small Businesses to Reduce Risk of Fraud, Intuit Inc. Plano, 2009 Rich, J.S. et.al. Cornerstones of Financial Accounting, South Western Cengage Learning, USA, 2012 Trenerry, A., Principles of Internal Control, University of New South Wales Press Ltd, New South Wales, 1999 [1] Agarwal, V., Internal controls in a retail store,[Website]. 2015. https://www.withum.com/kc/internal-controls-retail-store/ (accessed 25 July 2016) [2] Adams, K., Types of Internal Controls in a Grocery Store. Houston Chronicle, 25 July 2016. https://smallbusiness.chron.com/types-internal-controls-grocery-store-62145.html (accessed 25 July 2016) [3] Cardwell, H., Principles of Audit Surveillance, R.T. Edwards Inc. USA, 2005 [4] Frias, S.A., and Fajardo, C.L., Textbook in Auditing Theory (Assurance and related services), 4th Eds, KATHA Publishing Co. Ltd. Philippine, 2008 [5] Trenerry, A., Principles of Internal Control, University of New South Wales Press Ltd, New South Wales, 1999 [6] Rich, J.S. et.al. Cornerstones of Financial Accounting, South Western Cengage Learning, USA, 2012 [7] Horngren, C. Et al. Accounting, 7th Eds. Pearson, Australia, 2013 [8] Geyer, J.M., The Basics of Inventory Internal Controls.; ImproMed, 15 February 2011, Accessed from https://www.impromed.com/newsletter/article.aspx?a=227 (25 July 2016) [9] Hightower, R. Accounts Receivable- Cash Application, John Wiley Sons Inc., 2015, Available from E-book library (Accessed 25 July 2016) [10] Long, M.M., Internal Controls for Small Businesses to Reduce Risk of Fraud, Intuit Inc. Plano, 2009 [11] Internal Control: A Practical Guide, KPMG, UK, Service Print Limited , 1999