Auditing Using External Sources
Audits are done internally and externally. Internal should be done about twice a year, but internal audit checklists should be used every day to make sure all policies are being followed. External audits should be done once a year for large companies, and for smaller companies, more time can be in between. This is an important time for a business because everything spent is scrutinized and every check or petty cash dollar spent is checked to make sure it went to the right place. External auditing is done by professionals from an outside company and they are paid to make sure you did not make any mistakes, We will discuss the auditing process, terms, why keeping accurate records are important, and more.
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Hello everyone, today we will be discussing the process we used for the audit. We are from Siege Tech Auditing Company, and have been in business since 1986. We have a record for one hundred percent accuracy. We will start by discussing the type of internal controls that should be followed by the company
The first type of internal controls is detective controls. These are designed to detect errors or irregularities that may occur. Corrective controls are designed to correct the errors discovered by the detective controls. These two processes should not be handled by the same person, as this could cause a higher chance of human error. Human error is one of the main limitations of internal controls. Until this is done by computers, there will always be a margin of error.
Preventative controls are designed to keep the errors and irregularities from occurring. This is the most important type of control, because it can negate the need for corrective controls, and help the rest of the controls go smoothly. There are several types of preventative controls that can be used by everyone. The main controls are for example, preventing cash recorders from controlling the cash, and inventory personnel from controlling the inventory. This will keep the chance for theft and fraud down, as there is a second person to make sure everything is like it should be.
There are several internal control procedures you should be made aware of, including Approvals, Authorizations, bank reconciliations, Petty Cash funds, and many more. We will be discussing a few of these to make you a little more familiar with some of the internal control procedures we checked.
Bank reconciliation or reconciling the bank statement, is an important internal control procedure. To do this you verify that the amount on the bank statement I the same or compatible with the amounts in the cash account. This should go both ways, the cash account should match the bank statement. If they do not match then there is a chance the bank charged a fee we did not get a notice about, a check was wrote for the wrong amount, or that someone is stealing money from the company.
Petty Cash funds are used by companies to pay their obligations using checks because they provide a record of each payment. The fund is used to pay for small, miscellaneous expenses like stamps, delivery charges of small amount, or emergency supplies like pizza for a pizza Friday. The fund should not be very big as to impact the company??™s assets, or become a target for theft. But it needs to be big enough to cover the inconvenience of replenishing the fund.
???Authorization is the basis by which the authority to complete the various stages of a transaction is delegated.??? (Virginia tech, 2011) This is done in staged called recording, approving, and reconciling. The main aspects of authorization are privilege, role, action, and span of control. Privilege is what a person is allowed to do; role is the job of the person, such as payroll coordinator, administrator or principal investigator. Action is what the user can perform such as initiate, submit, approve. Span of control is the restrictions put upon the user. This is usually a restriction because of organization code, budget number, or other restriction.
Separation of duties we started talking about earlier. This just means that more than one person has to be in control over the lifespan of a transaction. What this means is no one person should be able to record, initiate, authorize and reconcile a transaction. This assures that mistakes cannot be made without being discovered by someone else. It helps keep people honest, and keeps them from making mistakes from being too complacent.
???No matter how well internal controls are designed, they can only provide reasonable assurance that objectives will be achieved.??? (Herrera, 2011) Limitations of internal control are based on the size of a company in some cases. For example a smaller business might have trouble having more than one person in charge of a transaction. A larger company would not have this problem because of the number of employees it hires. Separation of duties decreases the chance of controls being circumvented through conspiracy. Controls can still break down due to human error and manager overrides.
Human error is the biggest problem because humans are, well only human. “Error is simply a difference between an actual state and a desired state??? (Sheridan 2003) Human error is errors caused by humans by inattentiveness, poor judgment, or negligence. Human error is usually why we have to have an audit process. With programs like quicken, humans still have to add the amounts into the book to compare if the accounts are balanced.
If a company is small then there might not be enough staff to make sure all transactions are covered by more than one person. This can cause internal controls to not be fully followed, as there is not enough staff to cover them. Larger companies will not have this problem as stated earlier, so mostly small businesses are affected by this. For a small business this might not be as much of a problem, since most of the employees will have more than one function.
Sometimes the cost of adding the internal control would be too much money for a company. For example eye scanners at the doors so only non criminals can get into the building. This would not be cost effective, so that is why there are security guards instead. If the cost of the control is more than the company can pay, there is a lack of internal control in that area, but not by the fault of the business. Larger companies do not have this problem for most internal controls, but some are still not affordable to even them.
With your audit we did find a problem. There is a weak internal control system in place in your company, and we found three months that prepaid insurance was not recorded in the books. This led to the revenue of the business looking like it was fifteen hundred more than it really was. This makes your financial statement overstated, and can lead to fines if not corrected in the future. Companies like Enron and others have done this on purpose, to make money for themselves. On a smaller scale for example you receive inventory on two separate days, and you forgot to record the inventory for the second day. You would not know you have the items in your inventory, and you might forget to pay the supplier for the inventory. This could cause you to lose your supplier and then you would have to find another that will maybe make you pay more.
All in your entire audit went well. Please remember to watch the entries that need to be recorded so the mistake will not happen again. The next time we do an audit for you we will be watching for this mistake, and hope you will keep in mind some of the internal processes that should be started in this company to keep it running smoothly. Human error cannot be taken out of the equation completely, but I am sure you will be more careful in the future.
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