CHRISTIAN SERVICE UNIVERSITY COLLEGE

DEPARTMENT OF BUSINESS STUDIES KUMASI. NOVEMBER 2009.

REVIEWING THE INTERNAL CONTROL SYSTEMS OF AN ORGANISATION (A CASE STUDY OF MINIGOLD HOTEL, GHANA)

AUTHORS:

10236012 10235931 10235934 10235908 10235850 TUTOR: PROGRAM: SUBJECT: LEVEL & SEMESTER

Acheampong Emmanuel Ampate Kwateng Charles Ankomah-Darko Charles Frimpong Emmanuel Kwadwo Opoku Sarkodie Mr. Stephen Alewabah Bachelors Degree in Business Administration Accounting option Auditing and Investigation 400, First semester

INTRODUCTION
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SAS 300 (Accounting and internal control system and audit risk assessments) defines the internal control system as comprising the control environment and control procedures. Internal control could also be looked as the policies and procedures conceived and put in place by an entity’s management to ensure the economic, efficient and effective achievement of the entity’s objective; the adherence to external rules and to management policies, the safeguarding of assets and information, the prevention and detection of fraud and error, and the quality of accounting records and the timely production of reliable financial and management information. A strong internal control system of an organization contributes to achieving its objectives. Auditors have a responsibility to minimize opportunities by ensuring that adequate internal controls are in place. If internal controls are weak in a particular area the next step would be to consider red flags. A red flag is an indicator that some kind of irregularity is occurring and that something may be wrong. It does not prove that fraud has occurred but if a red flag is identified more detailed transaction examination is required. The hotel industry is one of the largest, most dynamic industries in the world and it is one of the largest employers of all industries and continues to increase along with any increase in the local economy, tourism and business travel (Gilmore 2003). According to Gilmore (2003), the hotel industry is of great benefit in the sense that it provides facilities for the transaction of businesses, meetings, conferences as well as for recreation and entertainment. Furthermore she argued that, the hotel industry serves as a source of facilities for local residents and as a result many hotels have become social centres for their communities. An example of such hotel is Minigold Hotel which is three star hotel in the economy of Ghana. PROBLEM STATEMENT The aim of every business is to make profit and increase shareholders wealth, the activities leading to this could be hindered by weak internal controls in an organization. Minigold Hotel have in its mission and vision statement as being customer oriented but in reality their actions of customer orientation in business is not actually being felt or seen by their customers. There are significance lapses in the following control environment and procedures of the organization •

Personnel policies and procedures (recruitment) Authorization of transactions and activities
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Timely recording of transaction Physical controls over assets Risk management

RATIONAL FOR THE STUDY The rational for the study is to describe what Minigold Hotel is doing and what they should do to • • • • • Ensure the accuracy of the Hotel’s accounting data and financial reports; Reduce the risks of fraud or theft against the Hotel by third parties or employees; Reduce the risks of unintentional errors by employees which could be damaging to the Hotel Reduce the risks of non-compliance with the Hotel’s policies and business processes; and Prevent unnecessary risk exposure due to insufficient risk management.

RESEARCH QUESTION How can strong internal control systems foster quality service delivery? SCOPE/LIMITATIONS The study is limited to Minigold Hotel, Kumasi in the area of internal control systems. However, perceptions from the hotel staff especial those at the auditing unit have being used to access the experience in the hotel and are exclusively related to the hotel operations. Even though questionnaires were design, some of the employees were unable to fill due to the busy schedule on their part. In view of this, the report is based on those who were able to complete the questionnaires. METHODOLOGY Method of collecting data • • Questionnaire Interview, face –to- face
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Study design The research was done on a case study approach; we selected an organization of our choice and reviewed their internal control systems. Again survey was adopted, this was because an unbiased representative sample was selected from the hotel for assessment to represent the whole. The reasons why these strategies was used was because peoples attitude and orientations in a large group was to be measured. The purpose of the study was largely the analytical type. Sampling methods used • Probability sampling method ( stratified sampling technique)

ANALYSIS AND INTERPRETATION OF RESULTS Base on our study it came to light that the organizational structure at Mingold Hotel is consistence, the hotel has a good organogram that states the duties and responsibilities of each and every line management, due to this it was observe that the chain of command is effective and every staff knows what he is expected to do and whom to report to. Moreover, it was discovered that the personnel policies and procedure requirement was not effective, majority of the staff lack experience and have no qualifications to the work requirement they do, then also there are no strict procedures in addressing recruitment issues for available vacancies. The recruitment is basically on nepotism and favoritism. This was discovered due to the kind of response gathered from our questionnaires on the kind of relationship they have with top management. It was also discovered that, there was poor timely recording of transactions; people responsible for this activities are lacking the required skills and knowledge to perform the work. The books are incomplete and lack consistency, this is slowing down management’s decision making role at the hotel because decisions are made on regular intervals by managements at the hotel.

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There is also poor authorization of transactions and records at the hotel, absence of segregation of duties. The concept implies that no single individual person should begin any given transactions such as purchases, sales, etc from the initiation or request stage to disclosure of the transaction in the accounts. Last but not least there is no proper risk management system in place at the hotel. The board of directors is responsible for the company’s system of internal control. It should set appropriate policies on internal control and seek regular assurance that will enable it to satisfy itself that the system is functioning effectively. The board must further ensure that the system of internal control is effective in managing risks in the manner which it has approved. (para. 16)

RECOMMENDATIONS We shall therefore use this opportunity to suggest to management of Minigold Hotel as to what could be done in other to further improve on their service and also reduce guest Complaint. We suggest that in order to attain objectives and make inform decisions management should undertake the following measures • Personnel policies and procedures should be strictly adhered to in other to acquire more qualified and experience personnel especially at the field of accounting, marketing and human resource. They could include in their twice a year program activities that would improve; empowerment of employees, promote teamwork and process improvement. In their process improvement, they could educate employees on the need to: respond to guest request on time, provide accurate bills to guest and also matters arising from guest complaint

The organisation should adopt the principles of segregations of duties in the course of their operations, what management should do is to make sure that the following activities are in place,

1. initiation or requisition for the purchase (Departmental Head); 5

2. Approval of the purchase Managing Director (MD) or his representative. 3. Authorization for the purchase by Deputy MD; 4. execution of transaction by the Purchasing and Supply Manager 5. Receipt and custody of the item, that receipt of the item into the store by Store-keeper. 6. recording of the item in the Stores Ledger by another Store-keeper at the stores in the

Cash Book and the Ledger by separate Accounts Clerk and the Accountant in charge of the Budget in the commitment Register;
7. Disclosure or presentation of the amount in the accounts by the Accountant in charge of

Final Accounts.

If management effectively assesses and responds to risks, the auditor will typically need to accumulate less audit evidence than when management fails to , because control risk is lower A technique to identify risks involves identifying and prioritizing high risk activities is:

1. Identify the essential resources of the business and determine which are most at risk 2. Identify possible liabilities which may arise 3. Review the risks that have arisen in the past 4. Consider any additional risks imposed by new objectives or new external factors; and 5. Seek to anticipate change by considering problems and opportunities on continuing basis.

Tests of Controls, management should put in place measures to make auditors

to test the effectiveness of control policies and procedures in support of a reduced control risk. The nature of tests of controls is that the tests generally consist of one (or a combination) of four types of evidence-gathering techniques:
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1. Inquiry of client personnel, Inquiry evidence is based on interviews concerning the

effectiveness of controls.
2. Observation, for controls that leave no documentary of evidence, the auditor generally

observes them being applied.
3. Examination of documents (inspection), and 4. Re-performance, if content of documents and records is insufficient to assess whether

controls are operating effectively, the auditor re-performs the control activity to see if the proper results were obtained

Then also management should adopt a periodic monitoring of operations at the hotel, they should monitor the ongoing or periodic assessment of the effectiveness of their design and operation Monitoring should address whether proper accounting records are being maintained and whether the financial information used within the business and for publication to third parties is reliable When evaluating the ongoing monitoring the following issues might be considered

1. Extent to which personnel obtain evidence as to whether the system of internal control continues to function 2. Periodic comparisons of amounts recorded with the accounting system with physical assets 3. Responsiveness to internal and external auditor recommendations on means to strengthen internal controls 4. Effectiveness on internal audit activities.

last but not least, While the board sets overall direction, it is management who must implement good controls by considering the following:
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1. Determine the need for controls, Managers must be able to isolate a situation where there

is a need for specific internal controls and respond appropriately.
2. Design suitable controls once the need for controls has been defined, management must

then establish suitable means to install them.
3. Implement these controls; Managers are then duty-bound to ensure that the control

processes are carefully implemented.
4. Check that they are being applied correctly, Management and not internal audit is

responsible for ensuring that control mechanisms are not being by-passed but are fully applied as they were originally intended.
5. Maintain and update the controls. This feature is also important in that securing control is

a continuous task that should be at the forefront of management concerns.
6. Inclusion of the above noted matters within any appraisal scheme that seeks to judge

management’s performance. We would expect management to consider the application of controls as part of management skills and training.

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