Introduction
Internal controls are defined as procedures or any methods that are adopted within an organization to safeguard the organization’s assets and ensure the reliability and accuracy of financial information (Song, 2012). Besides, such procedures are very important in the provision of the necessary platforms in an organization for the achievement of the organization’s goals and objectives as well as ensuring that all operational and financial needs are compliant (Cangemi, 2016). Therefore, organizations should ensure that there are effective internal controls to achieve the set organizational and business goals and objectives (Laux, 2012). This essay analyses the case of internal controls at X Company and Ms. Smith.
Case of X Company
Ms. Smith seeks reimbursement of routine travel expenses for a certain part of a planned trip, which she had booked using her credit card because the organization does not have a corporate travel account. The Chief Financing Officer and the Accounts Payable Clerk approve the reimbursement without scrutinizing the documents and Ms. Smith’s situation on the account of having worked with her previously. After the trip, Ms. Smith does not provide receipts of her travel expenses or even file a reconciling expenses file.
Missing Internal Controls
From the review of the case of X Company and Ms. Smith, it is evident that there are several missing internal controls in the company. First, the company lacks internal controls aimed at ensuring the accuracy and reliability of financial information. Often, internal controls focus on the availability of financial reports and information that is correct for making decisions (Hermanson, Smith, & Stephens, 2012). Such controls are implemented to ensure the availability of records covering any given scenario for justification purposes. In the case of X Company, such controls would have ensured that Ms. Smith provided all the necessary documentation before reimbursement of the travel expenses as well as after the trip.
Secondly, the company lacked controls for compliance with operational and financial obligations. Organizations need to ensure that all individuals within the organization comply with any set obligations including adherence to well-documented procedures in an organization as well as auditing (Pirayesh, Niazi, & Ahmadkhani, 2012). The CFO and Accounts Payable Clerk did not audit Ms. Smith’s case to ascertain whether or not the reimbursement request was justified.
Also, the company did not have internal controls towards safeguarding organizational assets. The availability of such controls ensures the protection of all forms of assets through the minimization of any actions that would lead to losses (Singleton-Green, 2012). This is achieved through several approaches including putting in place independent checks on procedures and processes and the availability of adequate management supervision. Such procedures were absent in the X Company.
Remedy
Internal controls are very important in any organization since they ensure that all processes and procedures follow a systematic outline with the primary objective being to achieve the organization’s objectives while ensuring that any obligations are met with minimal loss on the organization’s assets.
The case of X Company’s lack of effective internal controls requires attention. For example, to avoid scenarios such as Ms. Smith’s case, the company should put in place internal controls such as document control, batch reconciliation, independent checks, automated controls, validation checks, segregation of duties, and exception routines. Also, any form of expenses should be approved based on the availability of the necessary documents. For example, the company should put a requirement for all employees to file reconciling expense files whenever needed.
References
Cangemi, M. (2016). Views on Internal Audit, Internal Controls, and Internal Audit’s Use of Technology. EDPACS, 53(1), 1-9.
Hermanson, D., Smith, J., & Stephens, N. (2012). How effective are Organizations’ Internal Controls? Insights into Specific Internal Control Elements. Current Issues In Auditing, 6(1), A31-A50.
Laux, C. (2012). Financial instruments, financial reporting, and financial stability. Accounting and Business Research, 42(3), 239-260.
Pirayesh, R., Niazi, R., & Ahmadkhani, A. (2012). Investigating the effective factors on management internal controls applying. Management Science Letters, 2(4), 1203-1208.
Singleton-Green, B. (2012). Commentary: Financial Reporting and Financial Stability: Causes and Effects. Australian Accounting Review, 22(1), 15-17.
Song, Y. (2012). Analysis of Inventory Management in Internal Controls Perspective. AMR, 629(1), 972-975.