Role of Internal Controls
Internal control is designed to protect the business and financial assets from fraud. In addition, internal control is a way to ensure that accurate financial information is maintained and can be quickly searched and accessed by all operational areas of the enterprise. The main reason for the importance of internal control is to protect all the organization’s resources and, in case of a crime, to notify the responsible people and identify what is insufficient (Warren et al. 75). Thus, it creates a robust defense system that aims to prevent fraudulent activities.
Moreover, not applying internal control will not allow the organization’s owners to respond quickly to the problem. Accordingly, tracking the flow of goods with a complete inventory is only possible (Warren et al. 80). Consequently, criminals can steal goods from the warehouse for some time without the owner knowing about them. Therefore, the business will sustain losses, and when they are noticed, it will only be possible to establish the chronology of the thefts. Moreover, the lack of internal control reduces the effectiveness of business operations and the feasibility of certain decisions and financial actions.
Recommendations
Segregation of Duties
This means the owner hires special people to inventory goods and monitor their movement. Also, it is necessary to divide labor to ensure that all employees have only a fraction of the information they need (Warren et al. 81).
For example, warehouse workers who load and deliver goods should only carry out logistics routes with a certain number of goods. They should not have access to the inventory or information about all the properties on the warehouse floor. Accordingly, a clear division of responsibilities will change the likelihood of theft and fraud. In the event of theft, the employee who had access to the information or goods will immediately come under suspicion.
Restricted Access
There should be limited access to where the goods are stored. The reason is that if all workers can freely enter the warehouse, it will not be possible to determine which of them was the last to come into contact with the stolen goods. Instead, a control system, such as key cards, security codes, or biometric authentication, can ensure that only authorized personnel can enter the warehouse.
Moreover, this system can track when employees are in the warehouse and identify those who may have committed theft (Warren et al. 85). This principle should also be used to issue keys to delivery vehicles. Only people entitled to use them during the official delivery should be permitted to use them.
Control to Alert the Owner
The owner needs to constantly monitor the goods in stock and the quantity that should be in stock to avoid inventory loss. This requires checking the availability of goods in the warehouse and the number of goods delivered at specific intervals to determine whether the difference corresponds to the required quantity. It can be performed by using regular counts and checking the amount against the one specified in the documents. Moreover, one can automate the process and use video surveillance cameras to monitor the placement and storage of goods in warehouses effectively (Warren et al. 88). Thus, cameras that provide a view of what is happening in the warehouse from all critical areas can help control activities.
Financial Statements
If two televisions worth $400 went missing, this would impact the following reports.
- Balance Sheet: The inventory account in the balance sheet will reflect the decreased value, meaning that if the missing television sets were worth $800, the inventory account has declined, which has implications for the asset balance.
- Income statement: The missing televisions will affect the cost of goods sold (COGS) in the income statement. COGS reflects the value of stock sold during a given term. Since the TVs that are lacking are priced at $800, COGS will increase by this amount, decreasing income.
Work Cited
Warren, Carl S., James M. Reeve, and Jonathan Duchac. Corporate Financial Accounting. 15th ed., Cengage Learning, 2019.