Internal Audit Function Quality and Contribution †Free Samples

Question: Discuss about the Internal Audit Function Quality and Contribution. Answer: Introduction: The report is prepared to define the concepts of internal control system of organization and the extent of responsibility of management in handling such system. Importance of external auditor in the internal control system has also been demonstrated in the report. Report is prepared by referring to the case study on OLZ plc that is a manufacturing company. The weakness of internal control system of company and its possible impact on the financial records of company has also been explained in the report. Weakness of internal control system of company is explained in terms of likely impact on accounting figures and financial records. Later part of report discusses the recommendations for improving the purchase system procedures and control environment. Internal control system is the systematic measurement and procedures that is effected by management, directors and other personnel of organization for providing reasonable assurance of the objectives of organization in relation to financial reporting and operational effectiveness and efficiency. It can be said that it is a system that helps in providing reasonable assurance about three categories of objectives of organization namely operations effectiveness, financial reporting liability and compliance with applicable regulations and laws. Internal control systems of organization are preventive, corrective and detective. Preventive internal control systems are designed for keeping irregularities and efforts form occurrence in the first place (Alzeban and Sawan 2015). Corrective internal control systems are designed for correcting detected irregularities. On other hand, detective internal control system helps in detecting irregularities that might have occurred. The objectives of inte rnal control are desired conditions and gaols that minimizing the potential of unauthorized, waste, loss and occurrence of misappropriation. In order to form an effective control system, they must be in compliance and must be observable and measurable. The control objectives involve completeness, authorization, physical safeguard, accuracy, segregation of duties and handling of errors (Newton et al. 2015). Responsibility of management concerning internal control system: Management of organizations has the responsibility of maintaining the adequate internal control system by properly communicating the duties and expectations of staffs of control environment. The management can address some of the major areas of framework of internal control system. Moreover, they are responsible for system development to control and monitor risks. Management monitors the independent assurance functions. Operations, compliance and objectives of financial reporting are the responsibility of management and therefore providing reasonable assurance is internal control system adequacy (Boyle et al. 2015). Identification of risks along with maintaining, establishing and monitoring the system of internal control forms the management responsibility. Furthermore, the strategic direction of the obligations and agency in relation to the accountability such as implementation, operation and design of internal control system is an important area of concern of management. They need to be attentive and aware of risk management and other issues relating to internal control and documenting any risk and key areas. The given case study on OLC Plc depicts that the purchase order is generated by the employment of computer system that are automatically programmed for indication whenever there are minimum levels of inventory. The management of organization is responsible for pre determining the level of inventories. Purchasing director is involved in reviewing the purchasing order along with accounting for products previous price. Moreover, updating of inventory record system is done by computer input documents that are filed in the office of purchasing director. It can be seen from the analysis of case study that the filing of input document goes through proper documenting procedures that involves manager as well as accountants and clerks (Domingues et al. 2015). Some other officers that are involved in filing the documentation of invoice slips are office junior clerk and accountants clerks. Moreover, there is a proper procedures of all the transactions related to purchase. Therefore, it can be sa id that the internal control system of OLC Plc involves decision of management such as purchasing director at several levels. However, there exist some loopholes in the system of internal control relating to purchase order. It can be seen from the case study that the purchase order invoice is approved by office junior files until the end of week. It can be said that there exist time gap in such approval process that can be regarded as one of the problems of internal control system (Pizzini et al. 2014). The agency control system does not incorporate external auditors and they cannot be a supplement to an adequate internal control system. External auditors have the responsibility of providing independent assurance and accountability to external stakeholders. However, the reliance decision of external auditors has implications of effectiveness and efficiency on the overall functioning of audit and important economic consequence. For conducting the works of external audits and the increased scope and capability of internal audit, work has made external auditors relying on work of internal audit. In addition to this, the unnecessary duplication of audit procedures can be avoided by relying on internal auditing. This provides internal auditors with certain benefits along with external auditors. Compared to external auditors, internal auditors have more knowledge about the policies, procedures and business environment of company (Michelon et al. 2015). Therefore, in order to maintain the reality of independence and appearance, auditors must reconcile the advantage of relying on internal auditing. The internal control system and the audit plan of company along with development of internal audit function require the coordination of both external as well as internal auditors. Identified Weakness in the internal control system of OLC Plc: Augmentation of internal control system of the company can help in improvement of the can be produced on a daily basis control environment (Schaltegger Burritt, 2017). As mentioned in the given case study it can be hereby mentioned that approved invoices are registered at the week end and subsequently the same is passed on accounts professional of the company. There is no regular scrutiny as against records of the computer that in turn can be considered to be a weakness of the system of control of the corporation as regards systems of purchase. Again, the junior clerk carries out the process of reconciliation as against the records maintained in the computer. This can be considered to be a weakness of the control system of the organization as this process of reconciliation of ledgers needs to be carried out in a regular basis for the purpose of averting unauthorized purchasing by the firm (Mahadeen et al., 2016). In essence, this can be considered to be a weakness as improper alterations to different incorrect account can direct the way towards misappropriation of funds. The case study reflects the fact that the purchasing director signs and thereafter forwards the document to the pertinent supplier. There is no segregation and separation of duties in the identified phases of business (Aziz et al., 2015). Accordingly, it can be hereby said that different functionalities involved in the process of buying are not assigned to different people. There is only a single person who has the entire control over the process of buying actions. As mentioned in the case study, there is no inspection carried out during the time when Purchasing Director, authorises and there after forwards the document to the respective suppliers. Impact of such weakness on financial records of OLC Plc: It has been ascertained from the case study analysis that there is no inspection in the process of recording the printed orders of purchase invoices. Weakness related to internal control can be regarded as primary factor for the occurrence of fraud. If there is no adequate inspection in the process of internal control, this can lead to improper recording of financial figures and thereby misrepresenting the financial information of company (MaAyan and Carmeli 2016). One of the weaknesses that have been identified in the internal control system of company is lack of duties segregation. Segregation of duties is considered as one of the key concepts in placing the internal control over the assets of company. If duties are not segregated properly, this might lead to improper recording of business transactions that would have considerable impact on the financial statements of company. Segregation of duties does not enable execution of conflicting sensitive transactions that has the potential to influence the financial statements. Absence of such framework of duties segregation can be one of the causes of failure of internal control system and manipulation of financial statements and thereby adverse impact of the financial records o company (Burt 2016). Furthermore, it is ascertained from the case study analysis that management team of company determines the levels of minimum level of inventory. Proper scrutinization is considered as the pre requisite for the preparation of financial statements of company for its usage by investors and other stakeholders of company. If there is no appropriate scrutiny in the system of internal control system, there will not be correct recording and explanation of financial transactions pertaining to organization (He et al. 2017). This would not lead to presentation of true and fair view of financial statements of OLC Plc. Internal control weaknesses can be observed from the system of purchases of the organization (Michelon et al., 2015). As per the given case study it can be hereby mentioned that approved invoices are registered at the week end and thereafter the same is passed on accounts professional of the company. In this connection, it can be said that report from the purchasing department for accounting the specific sequence of several pre-numbered requisitions of purchase along with orders with respective delivery docket in order to ensure that all are bought and arrived. In addition to this, processes on selection of supplier have the need to be founded on overall quality, terms as well as delivery time together with prices. Again, management of the corporation might possibly consider preparation as well as presentation of pronouncements on a regular basis from specifically the professional responsible for registering Goods Inward (Bilman et al., 2017). This can particularly take into consider ation the specific sequence of various delivery dockets with respective Receiving Report Document to ascertain different items have been accepted by the firm. At the end of the week, in case if a specific invoice cannot be aligned and matched to a specific GRN, the low-ranking accounts professional of the firm scrutinizes the same and matches it against the records in the computer. This is mainly undertaken for the purpose of making certain that an order has been properly generated by the computer. In essence, when this is the case, then the invoice gets approved in the normal manner. In this regard, it can be said that there is requirement for proper management of time to carry out the process of marching on a regular interval (Afiah Azwari, 2015). As mentioned in the case study, printed orders of the company are analysed by the Purchasing Director, authorised and there after forwarded to the respective suppliers. Subsequently, a three part document of input namely Goods Received Note is carried out, illustrating supplier, delivered items and the total number of purchased units. This case study therefore does not talk about any kind of inspection during this process. Therefore, there is need to have signature and approval of the inspection clerk on each one of the delivery docket and the respective documents on receiving docket implying that different items accepted are in proper condition (Newton et al., 2015). Essentially, written report presented on any one of the items accepted with any damage along with defects has the need to be provided to executive of the purchasing department of the corporation for getting in touch with the corresponding suppliers to settle the identified issue (Leimbach et al., 2016). Bearing in mind the weaknesses of the system of purchasing, the management of the firm might possible consider segregating the duties for handling the purchasing system. There is no separation and segregation of duties as per the mentioned study. Essentially, this can help in making certain the fact that there is appropriate separation and segregation of duties, allocate associated functions of buying to diverse individuals (Guo et al., 2015). Basically, with appropriate segregation of duties, no single individual attains entire control over the process of purchasing. It can be said that instead of having a single junior client, the best exercise would be to have diverse individuals for undertaking the processes of approving purchases (Leimbach et al., 2016). The exercise also involves receiving various ordered materials, sanctioning specific payment invoices, assessing, at the same time reconcile firms financial records, and undertake counts of inventory. Moreover, management of the firm has the need to scrutinize accountability, process of authorization along with system of validation. Audit association might consider maintenance of accountability at the time of authorizing, assessing as well as approving various purchases founded on signed contracts, terms of contracts along with purchase order (Afiah Azwari, 2015). Therefore, the management of the corporation might possibly take into consideration proper maintenance of compliance with ethical ways of purchasing, assessment of authorization of signature on a periodic basis (Chen et al., 2017). Also they can acquire pre-approval of consultant and validate receipts of both goods as well as services against agreements. The case study shows that orders of the company are necessarily generated by the corporation for reacting at the time when there is minimum level of inventory. This shows that there is lack of scrutiny at this stage. This reflects that there might be unauthorized, unnec essary else wise fraudulent purchases. Also there might be unauthorised work that can be undertaken by suppliers. Furthermore, as the junior clerk checks with the computer records once in a week as mentioned in the case study, management might consider reconciliation of ledgers at regular basis for maintenance of accuracy of the registered business transactions (Afiah Azwari, 2015). Again, it is also important to monitor to make certain that the invoices of the purchases made in a very timely manner. Conclusion: In conclusion, it can be said that the current study helps in gaining comprehensive understanding regarding internal controls in a specific organization with special orientation to the case of OLZ plc. The current segment also helps in delving deep into the accountabilities of management concerning the internal control system with special emphasis on purchasing system of the company OLZ Plc. This study also carries out thorough analysis of the purchasing system that again helps in evaluating the weaknesses of the internal control system of the company. 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