Question

KKL consultancy Muscat provides tax and financial advisory services to their customers. Mazin
is one of their new client, who worked as an engineer. Mazin wanted to start a project and contacted
KKL consultancy Muscat for advice regarding profitable investment opportunities. KKL have
recommended him to invest in finance companies, stock market and insurance. KKL assured him
that they will look after his matters relating to tax, and would also invest in the name of the Mazin.
Providing all the surety by KKL consultancy, Mazin decided to invest in a finance company and
handed over a cheque for 10,000 OMR to KKL consultancy.
One day, Mazin came to know that KKL consultancy did not invest the money in any company
and did not pay the tax to the tax authorities. Despite Mazin’s repeated requests, KKL consultancy
had not provided the certificates of investment and receipt for payment of income tax. Mazin was
very upset due to unprofessional behavior of KKL consultancy. The consultancy firm was unable
to provide any proof of investment. Hence, a written complaint was lodged by Mazin to the Head
office of KKL consultancy.
The management and disciplinary Committee of KKL consultancy conducted the investigation
and found KKL guilty for not investing the money received from the client in a proper way as
directed by Mazin. According to the investigation report, KKL consultancy was found in violating
and breaching the customer’s confidence and trust. It was found that the amount which was
deposited by Mazin for investment was later invested by KKL employee for their own benefits.
The case was further referred by customer to consumer protection court. This news circulated and
was known by all the customers of KKL consultancy.
a. In your opinion, what would be the face saving solution for KKL consultancy, when their case
is already under the hearing process at consumer protection court? What is the learning experience
for KKL consultancy?
b. According to your observations, what were the gaps in the internal control system? How the
internal control system can be more productive and effective to avoid the cases like KKL
consultancy?

Answer 1

Internal controls system includes a set of rules, policies, and procedures an organization implements to provide direction, increase efficiency and strengthen adherence to policies.

The internal control structure of a company consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved.

The face saving solution for KKL consultancy is to build a strong internal control system and provide the customer compensation for losses.

Learning experience for KKL consultancy is Employee theft happen due to weakness in internal control system so fill  the gaps in the internal control system to avoid such theft or fraud in future.

An internal control system, not only prevent fraud forgery but also fulfills other objects:

1. The business organization implements its policies complying with the prevailing laws of the country.
2. Employees and officers discharge their assigned responsibilities to increase efficiency in the execution of work.
3. Financial statements provide correct and reliable information maintaining proper accounts.

2.

If your internal control system is missing any of the following elements you have internal control deficiencies: Robust physical security as in locks, alarms, cameras and limited access to your business's valuables. Clearly defined employee roles and job responsibilities

The gaps in the internal control system are-

• No Proper delegation of power,
• No Segregation of responsibility
• Non Adoption of adequate security measures to protect the Customer money, and
• Dependent control over the execution of activities.

Internal Control System-

1. Controlling the environment

   The control environment is the basis of other elements of all other components of the internal control system. Moral values, managerial skills, the honesty of employees and managerial direction, etc. are included in the controlling environment.

2. Risk assessment

   After setting up the objective of business, external and internal risks are to be assessed. The management determines risk controlling means after examining the risks related to every objective.

3. Control activities

   The management establishes a controlling activities system to prevent risk associated with every objective. These controlling activities include all those measures that are to be followed by the employees.

4. Information and communication

   Relevant information for taking decision are to be collected and reported in proper time. The events that yield data may originate from internal or external sources.

   Communication is very important for achieving management goals. The employees are to realize what is expected of them and how their responsibilities are related to the activities of others. Communication of the owners with outside parties’ like’s suppliers is also very important.

5. Monitoring

   When the internal control system is in practice, the organization monitors its effectiveness so that necessary changes can be brought if any serious problem arises.