Internal Controls

MEMORANDUM

TO: The Management

FROM: (Student’s Name)

JOB ROLE: Internal Auditor

DEPARTMENT: Accounting and Audit

DATE: 24/03/2020

SUBJECT: Guidelines on the Effective Implementation of Internal Controls

Internal controls are rules and procedures implemented within an organization to ensure the integrity of the set accounting and audit procedures. The primary objectives of internal control include safeguarding the effectiveness of operations in a company, enhancing the precision and reliability of financial reporting, and enhancing compliance with relevant laws and standards (COSO, 2013). Internal controls are crucial in eliminating defects within an organization as their implementation enhances the accountability of employees in completing their tasks. The supervision of operations brought about by internal controls is vital in enhancing smooth workflow. Reliable financial reporting is essential in improving the organization’s transparency and enhancing its relations with major stakeholders such as investors, employees, and even the government.

Internal controls ensure the reports released both quarterly and annually portray the true representation of the company’s financial performance and position (Force, 2007). Investors require this information to determine their investment return, including Equity. Internal control enhances companies’ compliance with laws and accounting standards, mitigating legal issues. Noncompliance hinders transparency and paints a negative picture of the organization. Equally important, compliance enhances and enables effective comparison of the company’s financial performance with its counterparts across the industry. The benefits of implementing effective internal control include the detection and prevention of accounting errors in accounting reports, mitigating fraudulent practices, ensuring grant finances are appropriately used, and fostering shareholders’ confidence in the proper use of their wealth.

In establishing a tone conveying a commitment to integrity and ethical values, the top management should demonstrate the company’s devotion to attracting, developing, and retaining competent and ethical workers. Considering effective implementation, there is a need for the organization to recruit the right workforce in the organization (Boritz et al., 2013). In some cases, internal control issues arise from contracting unethical workers with histories of fraud and noncompliance with legislation. At the same time, there is a need to empower the current workers with the required skills to enhance integrity. This addresses instances whereby workers are willing to implement internal control and are hindered by the lack of the required knowledge and dexterities (Force, 2007). On the same note, managers should continuously evaluate their workers in identifying areas of improvement, which should be addressed through development. Moreover, the organization should strive to retain competent and professional personnel, given that frequent employee turnover may thwart management’s efforts to enhance the implementation of internal control in the organization. In doing so, the management should undertake the following measures.

• Identify the required knowledge and skills in enhancing the implementation of internal control in an organization.
• Incorporating the set professional standards in employee recruitment, training, and retention.
• Researching the most effective financial training on offer in the industry and delivering it to the organization’s employees
• Examining the financial personnel capabilities and behavior.
• Establishing a list of alternative candidates in essential financial reporting activities.

In ensuring the organization attracts the right talent, there is a need to include competency standards in HR’s policy for hiring, training, and developing employees. Evaluation of the workers’ capability and behavior is essential in establishing effective strategies aimed at enhancing the execution of internal control. Training workers on financial reporting standards and reporting are vital, given this presents a grey area in fraud (Zhang et al., 2007). Lastly, there is a need to assess employees’ behavior and response to various situations to help identify their weaknesses. The financial reporting activity should be rotated among workers, hence the need for listing alternative workers who can perform this activity.

In establishing a tone conveying a commitment to integrity and ethical values, the top management should hold individuals accountable for assigned internal control tasks in steering the organization toward the realization of its long-term objectives. The organization should identify tasks and responsibilities to assign to the workforce in enhancing the implementation of internal control in the organization. For instance, executing supervision among employees in order of their rank so that issues can be identified early enough. For example, the senior accounts officer should countercheck statements prepared by the assistant accountant before they are forwarded to the management. On the same note, the accountants may be required to submit certain statements on daily operations.

Internal control is also enhanced by developing performance metrics in the organization (Boritz et al., 2013). These metrics should be attached with rewards as an incentive to employees to enhance the execution of internal control. These metrics should also be tied to compensation and promotion, which would ensure employees enhance their output in executing internal control within the organization. On the same note, employees would avoid undertaking activities that would undermine their chances of promotion in the future, for instance, incurring errors, engaging in fraudulent practices, or even noncompliance with set financial standards in the preparation of financial statements. Accountability should also be enhanced through the implementation of whistleblowing policies, whereby employees are allowed to raise concerns regarding fraudulent and unethical issues (Zhang et al., 2007). More often than not, low-level employees fail to raise awareness of such incidences due to fear of the implications of their actions. Therefore, policies that conceal their identity and protect them from retaliation attacks need to be executed.

In establishing a tone conveying a commitment to integrity and ethical values, the top management should implement effective risk management in the organization. Risk management entails identifying, evaluating, and mitigating potential risks that may thwart the execution of internal control in the firm, exposing it to fraudulent and erroneous financial reporting. The first step in this policy is testing the present internal control and determining their effectiveness in preventing fraud, errors in financial reporting, and unethical practices. In the event the internal controls implemented are weak, there is a need for the execution of effective strategies. The organization should examine risk control based on the IT innovations executed in the organization. The available technologies should be geared toward fortifying risk control; for instance, limiting access to financial records using strong passwords would be a good measure. On the same note, the organization should use its innovations to enhance internal control, for instance, the implementation of SAP and ERP (Chen, Smith, Cao, & Xia. , 2014).

Equally important, such software offers organizations continuous access to real-time data to enhance management’s control. For instance, implementing MRP ensures inventory levels are monitored by the management, employees, and suppliers, such that in the event of theft, at least one of the parties would be notified (Chen et al., 2014). Communication deficiencies that manifest vertically or horizontally should be identified and addressed in facilitating information flow. Risk assessment should also be conducted to identify loopholes in the organization, which might be manipulated for fraudulent practices. These grey areas should be rectified by implementing alternative procedures. Lastly, risk management should encompass remedial practices to be undertaken in the event of accounting errors or fraud. Even with effective implementation of internal controls, the organization cannot zero out fraudulent practices and errors, although they are minimized to minimum levels. Therefore, there is a need to establish steps to take in the event of such activities.

References

Boritz, J. E., Hayes, L., & Lim, J. H. (2013). A Content Analysis Of Auditors’ Reports On IT Internal Control Weaknesses: The Comparative Advantages Of An Automated Approach To Control Weakness Identification. International Journal Of Accounting Information Systems, 14(2), 138-163.

Chen, Y., Smith, A. L., Cao, J., & Xia, W. (2014). Information Technology Capability, Internal Control Effectiveness, And Audit Fees And Delays. Journal of Information Systems, 28(2), 149-180.

COSO, E. (2013). Internal Control–Integrated Framework Executive Summary. The Committee of Sponsoring Organizations of the Treadway Commission.

Force, C. T. (2007). Committee of Sponsoring Organizations of the Treadway Commission.

Zhang, Y., Zhou, J., & Zhou, N. (2007). Audit Committee Quality, Auditor Independence, And Internal Control Weaknesses. Journal Of Accounting And Public Policy, 26(3), 300-327.

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Internal Auditor Memo

Assignment Instructions

• You are to assume the role of an internal auditor who has been asked to identify a minimum of three high quality propositions that management can implement to establish a tone at the top that conveys a commitment to integrity and ethical
  

  Internal Controls

• You are to write a memo that is no more than three single spaced pages addressed to the CEO and head of the audit committee of the Board of Directors with recommendations on establishing the appropriate tone. THE TONE OF THE MEMO NEEDS TO BE FORMAL.
• Provide a detailed description of each of the items and a persuasive argument as to why the item is useful for conveying the appropriate tone. Cogently make a case for why these propositions are
• General memo format: Memo heading (person addressed, writer, date, subject), initial by name, introductory paragraph (context, purpose, and preview), headed segments, and conclusion. (See specific instructions and grading rubric)
• Properly identify any sources you have used to help you in your research. Citations and references should comply with APA requirements. (See specific instructions and grading rubric)
• You should consider any relevant guidance (e.g. COSO, SOX) and provide a minimum of three (3) citations. It may take well over three sources to complete this assignment and do a good job.

Note that simply finding three citations is not enough. Your citations need to be relevant. You need to do a thorough job finding what tone at the top means and how it is communicated. Be careful in citing non-

authoritative information.

Memo Criteria

Format and Adherence to the Assignment

• The appropriate title appears at the top (Memorandum).
• The appropriate headings appear (Date, To, From, and Subject) with 2-3 blank lines
  • To: From: Job titles follow names and department names follow titles. (names, job titles, departments)
  • Date: correct and current
  • Subject: brief and precise
• Memo is left justified with no paragraph indents and one blank line in between
• Memo text is single-spaced.
• No formal salutation or closing lines
• Appropriate end notations appear if
• Memo follows the assignment criteria in terms of form and content (i.e. outlines your reasons, background and implications/benefits)

Style & Tone

• Purpose of memo clear
• Tone appropriate for primary
• An appropriate amount of detail provided; memo is complete while being brief and
• Information is well organized; writing is cohesive and flows
• Logical, cogent & coherent
• Visual cues (bullets, numbers, indenting, headings) used to aid readability and understanding
• Follows APA style
• Memo efficiently conveys clearly the intent and information of the
• Text is broken into logical paragraphs with good paragraph
• Vocabulary accurate and effectively conveys
• Culturally sensitive, free from regional terminology and unfamiliar

Grammar, Mechanics, and Punctuation

• Rules of American English grammar and usage are appropriately
• Sentence structure and word order follow American English grammar and usage
• Spelling is correct and the essay has been carefully
• Subjects and verbs
• Verb tense is consistent and
• Passive voice is used only when needed and
• Commas, semi-colons, periods, and dashes are used
• Run-on sentences, comma splices, and sentences fragments are
• Conventions of capitalization are followed
• Punctuation rules and conventions are adhered to (apostrophes, parentheses, ).
• Expletives (it, there) and unclear demonstratives (this, that, these, those without a noun) are

 

Rubric for Assessment of ACG 4651 – Internal Auditor Memo						Pass – rewrite not required                                                                Rewrite – required                                                                                              Fail – rewrite not permitted
Student Learning Outcomes	Evaluation
	Developing (Poor)		Competent (Fair)		Exemplary
	Criteria	Rating	Criteria	Rating	Criteria		Rating
Content Knowledge (20%) Student demonstrates knowledge of relevant theoretical frameworks (E.g. “Tone at the Top”) and and/or relevant authoritative literature (guidance in SOX, COSO) & citations.	Fails to adequately demonstrate knowledge of “Tone at the Top” and/or relevant authoritative guidance literature (SOX, COSO) & citations.		Demonstrates some knowledge of “Tone at the Top” and relevant authoritative guidance literature (SOX, COSO) & citations.		Demonstrates proficient knowledge of “Tone at the Top” and most/all of the relevant authoritative guidance literature (SOX, COSO) & citations.
Critical Thinking & Analysis (40%) Student can identify a minimum of three high quality propositions that management can implement to establish a tone at the top that conveys a commitment to integrity and ethical values, and cogently makes a case (reasoning) for why they are important.	Fails to identify a more than one/or less high quality propositions with weak reasoning.		Provides two high quality propositions with somewhat adequate reasoning.		Provides three high quality propositions and cogently makes a case (reasoning).
Format & Adherence to Instructions (10%) Student follows appropriate memo format and instructions of the assignment. (See Format and Adherence to the Instructions)	Three or more memo formatting and adherence to instructions related mistakes.		Less than three memo formatting and adherence to instructions related mistakes.		Properly formatted with no memo formatting and adherence to instructions related mistakes.
Style & Tone (20%)   Students communicate in a writing style that is clear, organized, cogent and concise with appropriate tone for the audience. Follows APA style guidelines (See Style & Tone)	Unclear purpose and vague and/or partially articulated reasoning. Does not follow a proper tone and/or logical paragraph structure. Contains more than two/or more inaccurate vocabulary or jargon related issues. More than two APA style related errors.		Somewhat clear purpose and articulated reasoning. Somewhat appropriate tone and logical paragraph structure. Less than two inaccurate vocabulary or jargon related issues. Two or less APA style related errors.		Purpose abundantly clear and reasoning cogently presented via appropriate tone. Paragraphs logically and coherently build upon each other through the complete and fluent use of transitions and/or headings. No inaccurate vocabulary or jargon related issues and APA style related errors.
Grammar, Mechanics, and Punctuation (10%) Rules of American English grammar and usage are appropriately applied. (See Grammar, Mechanics, and Punctuation)	Three or more grammar, mechanics, and punctuation related errors.		Less than three grammar, mechanics, and punctuation related errors.		No grammar, mechanics, and punctuation related errors.