INTERNAL CONTROLS

Internal Controls

Name of Writer

Name of Institution

Table of Contents

Introduction3

Discussion4

Controls in Our Case7

Segregation of Duties7

Key Segregation of Duties in the Buying Process8

Review & Reconciliation9

Accuracy of activity9

Error correction10

Matching to the source10

Documenting the process and completion10

Access & Authorization Control11

References13

Internal Controls

Introduction

Internal Control is the cornerstone of business success. It assesses whether managers are receiving the relevant and correct information for decision making, assets are protected, and internal procedural laws and policies are followed by employees (Kinney, 2000). Additionally, the quality of a firm's Internal Control system is a key element on the informativeness of the auditor's reported financial statements (Pae and Yoo, 2001). Internal control has, no doubt, a direct effect on the quality of financial reporting (Doyle, Ge and McVay, 2007b; Feng, Li and McVay, 2009). An ineffective internal control is thus a sign that information provided to management for its decision-making process contains errors and that assets are not protected. Considering that assets are the collateral in any loan agreement, if these assets are not protected, then collateral will be viewed by creditors as overvalued assets. Therefore, to the extent that assets are not protected in a firm, creditors must account for the high risk associated with their investment in such firms by increasing the cost of borrowing. Likewise, credit rating agencies might lower the credit rating of such risky firms.

Moreover, disclosure of Internal Controls quality is dependent on the internal systems of the firm. Hammersley, Myers, and Shakespeare (2008) find that the information content of the disclosure of Internal Control Deficiencies depends on the severity of the Internal Control Deficiencies. Disclosure of Internal Control quality signals to the market on the corporate governance and oversight roles of the Board of Directors (Krishnan, 2005). Moreover, Irving (2006) argues that “An effective system of internal controls protects the integrity of transactions recorded as inputs to the financial reporting system and aggregated into financial reports.” Disclosure of ineffective Internal Controls affects past, present and future financial reporting (Irving, 2006) providing information to internal managers and market-wide participants for decision-making purposes such as buying and selling decisions, ratings by credit agencies, loan decisions, and rating firm creditworthiness.

When a weakness in the internal control system is disclosed to the public, it increases uncertainty about the firm's internal operations and activities (Beneish, Billings and Hodder 2008). Weakness is symptomatic of increased business risk (Ogneva, Subramanyam, and Raghunandan, 2007). Additionally, uncertainty increases the demand for risk-taking actions by investors and traders.

Discussion

In other words, each firm has its own unique set of internal control features. Also, results suggest that firms that report account-specific weaknesses tend to be larger, older, financially healthier, have more complex and diversified business operations and are growing more rapidly than firms that report company-level weaknesses. Likewise, firms with company-wide problems do not have either the resources or the experience to maintain a good control system. Moreover, the type of material weaknesses differs in terms of audit delay (Ettredge, Li and Sun, 2006). For example, internal control general weaknesses in personnel, processes, and procedures are ...