Premium Essay

Justification for Internal Control

In: Business and Management

Submitted By scarhan
Words 659
Pages 3
Justification for Internal Control Paper
Sharmain Carthan
ACC/544
September 1, 2014
Professor Fred Johnson

Justification for Internal Control Paper
A system of internal controls ensures preparation reliable financial statements, compliance with financial regulations, reduce risks, and identify and achieve short and long-term goals. Management uses internal controls to adapt to economic changes (AICPA, 2011, p. 2). Although there are controls in place with insurance and portfolio approaches, an efficient and cost effective internal control system is still needed. Insurance and portfolio approaches that manage and analyze risk and both plays an intricate part in the internal control system.
It is important to have an effective internal control system because with Sarbanes-Oxley Act the responsibility to ensure that the financial reporting is done accurately and efficiently. The Chief Executive Officer (CEO), Chief Financial Officer (CFO), and other upper level of management have this responsibility and are considered fiduciary. They have responsibilities to safeguard the assets of the company and can be held personally liable. Part of their responsibilities includes plan administration functions such as maintaining the financial books and records of the plan, and filing a complete and accurate annual return/report for your plan. Fraud and errors can occur at any point in the system. That is why it is important to establish safeguards to ensure the fiduciary responsibilities are met.
An integrated internal control system should achieve operational effectiveness and efficiency, relevant and reliable financial data, and verify law and regulation compliance. (AICPA, 2011, p. 4). If the internal control system is integrated, it will assist management in planning, organizing, directing and controlling daily business operations. Recording transactions,…...

Similar Documents

Premium Essay

Internal Controls

...personal justification. In order to protect a company’s assets against fraud and mitigate risk, Internal Controls must be established and adhered to. Internal controls are the policies, procedures and processes implemented by a company to create dependability and consistency in its accounting records, standardize operational efficiency, and comply with governmental standards. The following paper introduces governmental regulations, how to begin complying with them and further steps to take to increase internal controls. (Kimmel, Weygandt, & Kieso, 2009, p. 326)   Evaluation and Recommendation Objective: To evaluate current internal controls adhered to by LJB Company and recommend new internal controls to satisfy mandated governmental requirements recognized by all publicly traded companies in the United States. Sarbanes Oxley Act of 2002 LJB Company is preparing to become a publicly traded company in the near future. In order to do so, there are governmental conditions that must be accomplished. Of all, the requirements of most importance are those stated in the Sarbanes Oxley Act of 2002 (SOX). Confirmed in SOX, all corporations publicly traded in the United States must maintain sufficient internal control systems that protect a company’s assets from fraud and enhance truthfulness and dependable accounting processes and are certified by external assessors. (Kimmel, Weygandt, & Kieso, 2009, p. 327) There are 5 principal elements in an acceptable internal......

Words: 1291 - Pages: 6

Premium Essay

Internal Control

...Justification for an Internal Control System Justification for an Internal Control System Internal controls are key elements toward risk reduction for any organization. Although additional controls (insurance and portfolio approach) are currently in place, this paper will focus on the internal system, other approaches to risk management, and how internal controls will be beneficial for the organization overall. While current approaches also assume certain potential risk protection, internal controls can minimize financial loss by widening the scope of understanding amongst mid to senior level leadership. Within this paper, another risk protection technique (insurance) will also be discussed and compared to the proposed internal controls to measure the effectiveness of both. Internal control systems are good to use along with system wide interrelated approaches to managing risk. The more management involvement in the process the better and creates a since of understanding in the organization. Some senior level leaders believe that insurance creates the only safety net should they be in a potential loss situation. Although insurance does play a major role, prevention is the goal. Preventing a potential risk puts those processes in place that regularly identifies any deficiencies in the policy that can be corrected before any material misstatements occur to financial reporting. Portfolio and Other Approaches Companies often times use this......

Words: 461 - Pages: 2

Premium Essay

Justification for an Internal Control System

...Internal controls, controls the risk of companies financial loss or misstatements. Insurance and portfolio theory are the combined methods of internal controls. This paper will justify the need of internal control systems, insurance, and portfolio approaches, and why an internal control system is more beneficial. An internal Control system is responsibility of the Controller to analyze company performance in operations, compliance, and reporting as well as aid management in the development of budgets and goals (McCarthy & Flynn, 2004). Internal Control system is also responsibility to analyze and manage risks the company may encounter. An internal control system is composed of five interrelated components (AICPA, 2013): • Control Environment – the company’s fundamental values and directives. • Risk Assessment – the identification and analysis of possible material misstatements. • Control Activities – the policies and procedures used to identify and manage risk. • Information and Communication – the processing and distribution information needed to meet company objectives. • Monitoring- assesses the quality of the system’s performance over time. Insurance approach is a risk-financing tool for companies providing protection when a loss occurs. Most companies have insurance because not many organizations will be able to pay expenses following a loss. Even though insurance compensate losses it does not prevent any fraud in the company. Certain companies have a......

Words: 464 - Pages: 2

Premium Essay

Justification for an Internal Control System

...Justification for an Internal Control System Companies must mitigate risk to achieve maximum profitability. Mitigating the risk can be accomplished by implementing controls. While insurance and portfolio approaches are important control strategies, they are only single components of an overall risk management plan. Implementing an internal control system will assist management in monitoring and deterring risk. Current Controls The current approaches of insurance and portfolio are valid controls. One way to mitigate risk is to transfer some of the risk to a third party. The third party willingly accepts the risk for a fee or premium. This approach is called insurance. However, this approach is limited and considered reactive as it does nothing to deter harm to company assets. In addition, there are only certain risks that insurance companies are willing to take on and others that simply cannot be insured (McCarthy & Flynn, 2004). With the portfolio approach, all departments are treated as one unit so that interrelated risks can be identified and put “in the context of all the other risks and the company’s business strategy” (McCarthy & Flynn, 2004, pg. 255). However, it does little to deter risk. Internal Control System An internal control system is an ongoing process that ensures compliance with laws and regulations, reliable financial reporting and efficient and effective operations of an organization. According to Ratcliffe and Landes (2009), “an effective......

Words: 522 - Pages: 3

Premium Essay

Justification for an Internal Control

...Justification for an Internal Control Daniel R Rojas ACC/544 November 11, 2013 Fred Johnston Justification for an Internal Control In a business, any control system is great for a company. Insurance and Portfolio Approaches are good to have, however they’re not a guarantee as they fall under the category of being risky. The best way to lower the risk in a company is to invest more into internal controls. Having security on the perspective of being on the “inside” is less of risk oppose to just having external security. Internal controls, along with insurance and portfolio approaches will be discussed below. Take into consideration the pros and cons. There are a host of benefits and reasons why to comply with business insurance requirements imposed by both financial and government agencies. Financial service providers, especially banks and investors, may tie-up access to capital and financing when insurance requirements are not met. So it is of great benefit and importance to get the types and levels of coverage that meet their specifications. Government agencies (federal, state, and local) can impose fines, restrictions, and cancel required licenses that could virtually shut operations down. Second only to its employees, a business's structure, warehouse, products and property are important to insure. Business owners should make it a point to check out insurance companies that specialize in commercial property and casualty insurance. These companies know how to......

Words: 483 - Pages: 2

Premium Essay

Internal Control System Justification

...Internal Control System Justification Brandy Ritz ACC/445 May 5, 2014 Bunney Schmidt Internal Control System Justification Internal controls are a good way to keep records up to date and valid. Insurance and portfolio approaches are great to have set in place for risk management, but a system of controls would provide extra security with the books. Below is an overview of insurance and portfolio approaches along with why internal control systems would enhance the business. Risk Management Approaches Insurance Approach Insurance policies give financial protection to businesses in the event of any losses. These losses are unforeseeable and help with risk management ("Investopedia", 2014). The first step in this approach is to categorize the risk and find the policy for those risks. The losses can cover property, income, and liability ("Insurance and Risk", n.d.). This approach is valid because having the insurance to cover economic or natural events will help rebuild a company. This helps give the business security. Portfolio Approach The portfolio approach has parameters defined both on an individual and combined basis. The purpose of this approach is to help make decisions that are more certain (Thomas, 2002). The contents usually include objectives, risk tolerances and constraints, and developing and implementing strategies. The portfolio needs to be monitored and adjustments made when changes occur (Thomas, 2002). The portfolio approach is a valid......

Words: 649 - Pages: 3

Premium Essay

Justification for Internal Control

...As the controller of this firm, it is my duty to re-evaluate the control systems of this company, both internal and external. As the current control system is working appropriately, there is a need for more, which further justifies the need for an internal control system. As previously indicated by the firm, there has also been the usage of external control systems and they appear to be more useful and cost effective, but the truth is that a properly operated internal control system is more beneficial to a company than an external one. The cost could vary and sometimes be more expensive, but the gain in the usage is worth the funds appropriated for the internal control system. Insurance and Portfolio Approach Many organizations tend to use the insurance or portfolio approach to manage the risks associated with controls of the organization, but other organizations tend to explore other options such as the internal control system. To assist in further providing justification for an internal control system, it is necessary to identify and explain the current controls that are in place with the insurance approach and the portfolio approach. The insurance approach is very valuable as it protects the company against loss due to fraud or even negligence. A popular insurance approach is the usage of surety bonds for the controller handling the finances and blanket bonds that could cover CEOs, Board members, and any other staff members that handle cash. The portfolio......

Words: 594 - Pages: 3

Premium Essay

Justification for an Internal Control System

...Justification for an Internal Control System Christine Griffin ACC 544 July 28, 2014 Richard Cornett Justification for an Internal Control System As the controller for my company, I monitor all financial activities, conduct audits as needed, create high-level financial reports, and implement accounting methodologies to make the company run efficiently (PayScale, n.d.). The leadership of the company has asked me why there is a need for an internal control system when controls are in place with insurance and portfolio approaches. Insurance Approach A company will purchase insurance to protect their assets. The owner of a company will purchase liability insurance to protect his income, home, and other personal items of worth. The company will do a risk analysis to determine the most significant risks of the company. Then the company will purchase insurance to mitigate these risks. Not all risks require insurance as they can be eliminated by changing procedures. Some of the risks that should be covered by insurance are • Property damage • Inventory loss or damage • Employee theft • Various liabilities – injuries to customers, et cetera • Errors and omissions liabilities • Business interruption • Death of an owner or disability of owner The techniques to deal with risk is to find ways to avoid it by eliminating dangerous products or procedures, reduce the frequency and severity of risks, and transfer the risk to an insurance company. The transfer will......

Words: 629 - Pages: 3

Premium Essay

Justification for an Internal Control System

...Justification for an Internal Control System It is the responsibility of the Controller to analyze company performance in operations, compliance and reporting, as well as aid management in the development of budgets and goals (McCarthy & Flynn, 2004, p. 265). It is also their responsibility to analyze and manage risks the company may encounter. To perform these tasks controllers and company financial officers establish internal controls. A system of internal controls ensures preparation reliable financial statements, compliance with financial regulations, reduce risks, and identify and achieve short and long-term goals. Management uses internal controls to adapt to economic changes (AICPA, 2011, p. 2). Insurance and portfolio theory are approaches to managing and analyzing risk and play an important part in an internal control system. Internal Control Systems An internal control system is composed of five inter-related components, 1) Control Environment, 2) Risk Assessment, 3) Control Activities, 4) Information and Communication, and 5) Monitoring. The control environment is the company’s fundamental values and directives, risk assessment is the identification and analysis of possible material misstatements, control activities are the policies and procedures used to identify and manage risks, information and communication involves the processing and distribution of information needed to meet company objectives, and monitoring “assesses the quality of the system’s......

Words: 671 - Pages: 3

Premium Essay

Justification for Internal Control

...Justification for an Internal Control System ACC/544 The Controller is responsible for analyzing a company's performance in compliance and reporting, operations and assist management in developing its goals and budgets. They are also responsible for analyzing and managing risks companies may encounter. Performing these tasks require the controllers and financial officers to establish internal controls. The internal control system ensures that financial statements are reliable and are compliant with financial regulations; risks are reduced, and short and long time goals are identified and met. Internal controls are systematic measures (such as reviews, checks and balances, methods and procedures) instituted by an organization to (1) conduct its business in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deter and detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accounting data, (5) produce reliable and timely financial and management information, and (6) ensure adherence to its policies and plans (Business dictionary.com). Internal control systems are improved ways of controlling organizations with minimize risk, loss reduction, and also to achieve goals. Justifying the need for the internal control system can be done by using the insurance and political approaches. Asset allocation, security valuation, performance, and optimization are considered with the approaches. Companies acquire......

Words: 530 - Pages: 3

Premium Essay

Internal Control

...choice alternatives (good v. evil), somehow measure or weigh these, and then decide on the basis of the greater good (or the lesser evil). Duty based ethics does not require that consequences be considered. 3-7 Monastic theories are based on idealizations or simplifications of the real world. The real world is “messy” with the context of a situation, such as whether there is three party or two party accountability, having a major impact on the proper role of an individual. Everyone has multiple social roles in life and it is the conflicts in these multiple roles that seem to cause the most problems for monastic theories. 3-8 In the current audit environment, PAs are expected to better justify their decisions. This need for justification, including the consideration of ethical issues, increases the importance of critical thinking. 3-9 Three specific aspects of on-the-job independence 1. Programming independence 2. Investigative independence th Smieliauskas & Bewley, Auditing: An International Approach, 6 Edition Solutions Manual Page 3-1 © 2013, McGraw-Hill Ryerson Ltd. All Rights Reserved 3- Reporting independence 3-9 Professional ethics provides guidance on the conflicts of interest created by the PAs roles, whether as auditor, tax advisor, or management consultant, in helping justify PA’s decisions. 3-10 In a class action lawsuit, a few aggrieved persons with small losses can bring suit on behalf of a large group of......

Words: 5626 - Pages: 23

Premium Essay

Justification of Internal Controls

...Justification for an Internal Control System ACC/544 Internal Control System Relying on the insurance and portfolio approach are acceptable for maintaining organizational risk, however, for optimum protection there must be internal controls in place. This report will focus on justifying why implementing internal control is better than relying on the insurance and portfolio approach. Although the insurance and portfolio approaches will be explained, the report justifies why an internal control system is vital to successfully managing risk. As a result management will be able to identify why an internal control system works best. Insurance Approach Insurance in terms of risk management is the process of preparing for the possibility of an event happening that might cause harm to the business. By using the insurance approach, an organization prepares in advance for what might go wrong, plan preventive measures, and protecting investments. The drawback to the insurance approach is that it suggestes an organization will fail and will need to be prepared for that possible failure. Management basically attests to accepting a loss. This realization is not a positive aspect for the company and management should consider a new approach. Portfolio Approach The portfolio approach is a good way to quantify risk while maintaining certain levels of adequate investments. When using this approach, management tends to combine risk so that the organization looks better on......

Words: 402 - Pages: 2

Premium Essay

Justification for an Internal Control System

...Justification for an Internal Control System Crystal Spencer University of Phoenix ACC/544 Internal Control Systems Christina Yang May 14, 2012 The purpose of this brief report is to justify the need for the internal control system in any organization, when controls are in place with an insurance and portfolio approach. An internal control system in any organization is a way to regulate, to reduce lost, to minimize risks, and to accomplish the organizational goals and success (McCarthy, 2004). The majority of organizations depend on the insurance approach and the portfolio risk management approach. These approaches are used to manage a business risk, whereas some businesses depend on the benefits of an internal control system. I will now explain the two types of approaches insurance and portfolio used in an organization. Insurance approach The insurance approach is generally used to ensure the acquirement to transfer certain types of risks that could affect the business property, the business assets, and affect the employees (McCarthy, 2004). The insurance approach used as a tool to prevent business losses; in addition, it is more like a financial risk tool than management risk tool. This approach will diminishes the impact of the losses, protecting the business assets from potential losses, therefore, making the insurance approach more reactive, than proactive (McCarthy, 2004). Portfolio risk management The......

Words: 882 - Pages: 4

Premium Essay

Justification for an Internal Control System

...Internal Control Systems are very important for the risk management department of a company. This system helps keep the company protected from losing assets or incorrect use of assets. They also assist the company with keeping record and staying on track with objectives needed to be met. A controller’s duty would be to support management and the reporting of accounting and financial information. To start off, insurance and portfolios would complete the internal control system. Having a complete internal control system can further protect the company from risks. The controller is or can be an employee who’s job title is mainly to be the backbone for management when dealing with accounting and financial records that deal with the controls of organizations and organizational goals. If the main focus of the controller is financial controls and the financial process, along with the internal control system in play, the more genuine the information that the controller provides will be. Just having insurance does not guarantee that a company is protected from risks. Companies cannot ensure every risk. The insurance can cover things that happen to the company or facility and their equipment. Things that can be covered would be flooding, fires, or accidents that occur on their property. With insurance, the company is only expecting a small loss. A risk that is not protected by insurance would be a risk that can destroy the company’s reputation. It takes time to build a positive...

Words: 911 - Pages: 4

Premium Essay

Internal Controls

...Justification for Internal Control Systems Internal control is an action used by organizations to help improve the achievement of organizational objectives. An internal control system includes organizational design, written policies and procedures, operating practices, and barriers that protect assets and personnel. Also internal control addresses risk assessment, control activities, communication processes, and monitoring processes (eNotes, 2012). Internal control systems discourage and identify incidents of errors and irregularities that may occur. Organizations that use the insurance and portfolio approaches to manage risks are beginning to install internal control systems. Insurance and Portfolio Approaches to Risk Managing risk is a process for identifying, assessing, and prioritizing risks of different types. Insurance is a type of risk management used to protect against the risk of an unexpected loss. Insurance can be defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment (Wikipedia, 2012). Buying insurance is not the best way to reduce risk. When risks are transferred, the cost of the transfer and insurance should be taken into consideration. Sometimes the cost of the insurance exceeds the tolerable limits that an organization is willing to pay. As a result, organizations either accept the risks or find another way to deal with diminishing risks (McCarthy & Flynn, 2004). Portfolio management formulates......

Words: 833 - Pages: 4