Phases of Control Evaluation
ACC/544
Bunney Schmidt
January 28, 2013

The purpose of the internal control evaluation is to assess control risk and provide useful information to management and directors for carrying out the company’s control mission (Louwers, Ramsay, Sinason, & Strawser., 2007). The first phase of the audit cycle is to understand and document the client’s internal controls. This phase introduces the auditor to the client’s control environment and management’s risk assessment (Louwers, Ramsay, Sinason, & Strawser., 2007). Phase two of the audit cycle is to assess the control risk. This phase analyzes the control strengths and weaknesses to assess the control risk (Louwers, Ramsay, Sinason, & Strawser., 2007). The third phase is to perform tests of controls and reassess control risk. In this phase of the evaluation the required degree of compliance with the control policies and procedures and the actual degree of compliance are determined (Louwers, Ramsay, Sinason, & Strawser., 2007). For the accounts payable process the first control objective is to make sure the purchase orders are only used by authorized individuals. If the policies and procedures are not effective in holding individuals accountable for unauthorized use, this could provide a control risk for the company. It is important that po numbers are used, and they are kept track of. They should also be approved by management, and all vendors should know who is authorized to make purchases. When invoices are received it is necessary to make sure all invoices have a po number on them. There is the potential for purchases to be made without a po thus resulting in an unauthorized purchase. It is important for a vendor to know that a po is a requirement, and there is to be no purchases made without one. There should also be an approval from management on every po. The po numbers on the invoices should be compared to the po sheet to verify every item purchased. There could be the potential to sneak extra product in an order without it being on the po sheet. If there are unauthorized purchases, there needs to be a process in place to hold individuals accountable for their actions. Each invoice should be regularly entered into the system. If this is not done, there is the potential for invoices to be missed or lost therefore providing inaccurate numbers for management. Invoices should be collected daily, reviewed for each previous control objectives, and entered into the accounting system. At month end all invoices should be checked against the vendor statements. There is always the potential to pay an invoice that is not on the current statement, or miss an invoice on the statement and not pay it. Every statement should be compared against every invoice entered in the system. All vendor invoices should be paid in a timely manner. If payments are not paid timely, potential discounts can be missed and late fees can be incurred. Due dates should be watched daily to prevent late payments, and vendors offering discounts should be paid first. Lastly, payment checks should be approved and signed by authorized personnel. When unauthorized individuals sign checks there is fraud being committed and unauthorized purchases take place. All checks should be taken to an authorized individual, and any amount over $1,000 should be signed by two authorized parties.

References:
Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2007). Auditing and Assurance Services. Chapter 5. McGraw-Hill Companies, Inc.