Question

In: Accounting

a) Compare and contrast the internal controls in a typical small company with those in a...

  1. a) Compare and contrast the internal controls in a typical small company with those in a typical large company.

            b) Explain the impact on the auditor of a typical small company and how the auditor may overcome any resulting difficulties.

Solutions

Expert Solution

a) answer: Internal Controls are to be an integral part of any organization's financial and business policies and procedures. Internal controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices.The most important step for any small business owners is to implement properly designed internal controls.Internal controls are procedures or processes put in place by a business to: Safeguard assets.Ensure financial reporting is accurate and meet all financial reporting requirements.Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Besides complying with laws and regulations and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.Financing describes how a business raises money to fund operations and new projects. New small businesses typically receive financing from the personal savings of owners, small business loans from banks, and gifts or loans from friends and family members. Well-established small businesses and medium-sized companies might be able to attract financing from outside investors and money from venture capital firms. More recently, some firms have turned to online funding campaigns at sites like Kickstarter in order to launch a new project or an entire business.Large corporations can raise money by selling shares of stock to the public and by selling corporate bonds.Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud.Control activities refer to the specific detailed policies and procedures, such as review of company performance through variance analysis, physical and logical controls, and segregation of duties. Segregation of duties is an important internal control that helps prevent a lot of problems, one of which is fraud. By having different employees count inventory and have access to the ledger records, this helps prevent employees from stealing inventory and writing it off on the sub-ledger.

b) answer: Once the auditor gains an understanding of the client’s system of internal controls, the auditor must assess control risk. Control risk is the risk that the client’s system will fail to prevent or detect and correct an error. Ratings range from low to high to maximum. Low means that the client’s internal controls are strong and maximum means that the controls are virtually useless. If a client’s system of internal controls is assessed below maximum, the auditor must test the internal controls to ensure that they are functioning in accordance with the auditor’s understanding.Testing of internal controls includes making inquiries to management and employees, inspecting source documents, observing inventory counts, and actually re-performing client procedures. Finally, the auditor will perform more substantive procedures to assess the level of overall risk according to the audit strategy.The auditor’s opinion that accompanies financial statements is based on an audit of the procedures and records used to produce them. As part of an audit, external auditors will test a company’s accounting processes and internal controls and provide an opinion as to their effectiveness.Internal audits evaluate a company’s internal controls, including its corporate governance and accounting processes. They ensure compliance with laws and regulations and accurate and timely financial reporting and data collection, as well as helping to maintain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit. Internal audits play a critical role in a company’s operations and corporate governance, now that the Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of its financial statements.Internal audits play a critical role in a company’s internal controls and corporate governance, now that the Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of its financial statements.

There are two types of audit strategy, they are:

Combined Audit Approach – Includes tests of controls and substantive testing (when control risk is assessed to be below maximum)

Purely Substantive Audit Approach – No tests of controls are performed; only substantive tests are done (when control risk is assessed to be maximum).

Auditing techniques and control methods from England migrated to the United States during the Industrial Revolution. In the 20th century, auditors' reporting practices and testing methods were standardized.


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