Altaya, Alyssa Paula C.

ACCE 311 (2992)

Operations Audit

LET’S ANALYZE- INTERNAL CONTROL

Activity 1. Now that you have understood internal control, I will require you to explain
thoroughly your answers in the questions given below.

1. How is internal control relevant in the success of an organization?

Internal controls play a vital role in the organization's success since it
establishes safeguards to the asset of the organization and minimizes the
opportunities of committing fraud and allowing errors to go undetected in
daily operations. In addition, it is usually established based on a risk-oriented
approach to ensure that your organization focuses on high-risk areas wherein
understanding risks will help you to determine if there are adequate controls
to mitigate the risks in those areas. Moreover, internal control helps to
prevent errors and misstatements of financial statements. Thus, by following
internal controls, employees get a better understanding of the company
processes and practices, which helps to establish the company’s practices.

2. Explain management override and how does it affect internal control

implementation?

Management override of internal controls is the intervention by managers in

handling financial information and making decisions contrary to internal control
policy. Managers may think they have the ability to operate outside of the internal
controls, but this is not true since it may be a major violation of a company’s
accounting policy. Most companies use their managers as reviewers of employee
work, meaning the managers are unable to make changes to financial information.
Thus, companies seeking to avoid management override of internal controls will
implement internal and external audits to review their financial information. These
 audits are objective views on how the company’s accounting policy is being used in
the accounting workflow.

IN A NUTSHELL
Activity 1. Based on the discussions of the internal control, please feel free to write your
arguments or lessons learned below. I have indicated my arguments or lessons learned.

1. Monitoring controls is a continuous improvement project to ensure they remain

adequate and effective. The trick to preventing fraud is to stay one step ahead of
would-be thieves. Manufacturers with proactive controls — including thorough
physical controls over assets, management review, account reconciliation and
monitoring — can reduce the duration of schemes and their fraud losses.

Your Turn

2. Internal controls can never be completely effective, regardless of the care followed
in their design and implementation. Even if management can design an ideal system,
its effectiveness depends on the competency and dependability of the people using
it. Assume, for example, that a carefully developed procedure for counting inventory
requires two employees to count independently. If neither of the employees
understands the instructions or if both are careless in doing the counts, the
inventory count is likely to be wrong.

3. Responsibilities for internal controls differ between management and the auditor.
Management is responsible for establishing and maintaining the entity’s internal
controls. Management is also required by Section 404 to publicly report on the
operating effectiveness of those controls. In contrast, the auditor’s responsibilities
include understanding and testing internal control over financial reporting. Auditors
of larger public companies are required by the SEC to annually issue an audit report
on the operating effectiveness of those controls.
4. Management, not the auditor, must establish and maintain the entity’s internal
controls. This concept is consistent with the requirement that management, not the
auditor, is responsible for the preparation of financial statements in accordance with
applicable accounting frameworks such as GAAP or IFRS. Two key concepts underlie
management’s design and implementation of internal control—reasonable
assurance and inherent limitations.

5. A company should develop internal controls that provide reasonable, but not
absolute, assurance that the financial statements are fairly stated. Internal controls
are developed by management after considering both the costs and benefits of the
controls. Reasonable assurance is a high level of assurance that allows for only a low
likelihood that material misstatements will not be prevented or detected on a timely
basis by internal control.