Internal Controls – Case Study 2

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Internal Controls – Case Study 2

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Shelley Quinn

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rs e Keller Graduate School of Management
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ACCT504
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Professor Byrd
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February 7, 2016
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 Internal Controls –Case Study 2

Internal Controls

In an organization, having a specific internal control process that follows precise

procedures and policies throughout is essential to ensure that the organization achieves its goals

and objectives. Internal controls is written and implemented by the management team and

ensures that all directives are followed by all employees. The written internal control policies

should follow the compliance of laws or regulations within that industry, and all employees

should remain compliant within those laws.

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According to KJ Henderson, “The Committee of Sponsoring Organizations of the

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Treadway Commission recognizes five essential components to this system: the control

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environment, risk assessment, control activities, information, and communication and

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monitoring”. In writing internal processes, management should follow essential components that

adhere specifically to its industry.

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Components of Internal Controls:

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The Control Environment:

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The value and importance is which the management team in any organization places on

risk management and auditing functions within an organization, is referred to as the control
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environment. The implementation of this important component should be used to address how
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and what methods of internal control initiatives will be used. In unregulated industries, many

control environments are considered lax while very few written policies are implemented, and
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often employees are given free reign. In more regulated industries, including financial services,

there is a more strict and formal control environment. It involves strict compliance measures

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 Internal Controls –Case Study 2

within various departments such as human resources and legal which in turn minimize financial

and legal risks to the organization.

Risk Assessment:

The component involving risk assessment within an organization, are actions that are

used to rule out or determine all situations that may impose a financial or legal risk to the

organization. This also helps to keep a company safe from compliance issues and fraudulent

activities. This component helps organizations to assess areas within that pose the greatest risk to

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the organization such as stolen assets, wasted or misappropriated resources, and unsound or

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incompliant accounting practices.

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Control Activities:
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The component of control activities involves assurance that the written policies,
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procedures, and best practices are carried out in such a way that minimizes risk to the
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organizations success and well-being. Organizations can use a variety of activities such as

authorizations, approvals, verification of functions, operating performance reviews, duty

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segregation, and asset security in this necessary component.

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Information and Communication:

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When training employees, it is essential to use the component of information and

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communication within an organization. Implementation of this component can vary in different

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ways. Although there should be written policies and procedures for all employees within each

department, human resources can deliver this component as an onboarding of new employees,

and ongoing training for current employees in an effort to minimize risks to the organization.

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 Internal Controls –Case Study 2

Monitoring:

The internal control structure component of monitoring is an organization’s self-auditing

of risk management systems. This component is used to ensure that all employees are compliant

within the internal policies and procedures. In some organizations, an internal audit committee is

created specifically to monitor all departments within the organization. In some instances,

organizations may hire an outside auditing service that will complete the audit in an effort to

provide an assessment of how successful an organization’s internal control system is.

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Case Study Situation A:

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In evaluating the internal control over inventory for the Williams Oil Services

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Company, an auditor learns that the warehouse receiving clerk is responsible for ordering
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parts for supply inventory use in drilling services, counts the inventory when received at

the dock, records the receipts into the inventory ledger, and takes the annual inventory, No
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supervisor reviews the receiving clerk’s work.

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The weaknesses in this situation are the control activities, monitoring, and risk
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assessment components of the internal controls process. There should be a written policy or
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procedures that would require the supervisor to review and monitor all inventory orders, counts
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upon receipt of goods, and recording of annual inventory. This would also ensure that the
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receiving clerk would have a specific verification of his or her function and that all orders were

approved and accounted for to reduce the risk of asset security or fraud.
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 Internal Controls –Case Study 2

Case Study Situation B:

Nicole Lopez handles employee travel and expense reports for Scott Sales Services.

With the growth in the economy, the sales team began traveling extensively gaining new

business. Because of the heavy volume, she no longer required the sales team to provide

original airline, hotel, or car rental receipts. She told them to just keep their meals under

the $100 per day per diem and no receipts were required. She allowed them to use their

own credit cards so they could get the frequent flyer points. She required them to turn in a

summary of the travel expenses quarterly.

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In this situation, all accounting practices may not be being handled correctly, which can

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lead to a misappropriation of funds and fraud which in turn could affect the safety and risk

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factors of the organizations. Because the sales team is traveling more and gaining a higher

volume in sales, it is essential to keep good records within the control environment. There should
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be internal controls surrounding risk assessment, control activities, information and

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communication, and monitoring components. The sales team should be required to use company

funds and reporting methods when traveling, including turning in receipts. There should be
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information and communication as to the policies and procedures when traveling given to each

employee who travels to ensure timely and accurate expenditures for the organization. A
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quarterly report can be used by employees and monitored by Nicole. Auditing expense reports
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and monitoring spending can help to reduce financial risks to the company.
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 Internal Controls –Case Study 2

Case Study Situation C:

Michael Jordon is a new employee hired from Craig’s List recommended by a co-

worker. Mike was hired as a Human Resource Assistant. Mike’s first day on the job he is

told that he should follow his own judgments when deciding how employee issues such as

hiring and firing of employees, sexual harassment, and ethical infractions should be

handled.

In this situation there are several weaknesses in the internal control system. The

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components that are obviously missing in this situation are the control environment as a whole,

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the information and communication, control activities, and monitoring. Upon new hire

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orientation in an organization, the new employee should be given a company handbook with

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written policies and procedures (which include information and communication) he or she to

follow. Especially since Michael is working in the capacity of a Human Resource Assistant he
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should be made aware and agree to all of the written policies within the handbook. Control
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activities for this position should include a verification of all functions, duty segregation, and

compliance regulations and laws in regards to hiring and firing employees, ethical behavior, and
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sexual harassment within the organization. This should be audited annually to ensure all

regulations are being upheld and that there will be minimal risks to the organization as they
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relate to employment law regulations.

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