Question

You are currently part of a university work experience program. Your job placement is at the municipal transit centre. Your supervisor is responsible for the recording and distribution of monthly transit passes to authorized vendors throughout the city. The vendors pay €50 per bus pass and sell them for €55. Your job is to prepare a monthly reconciliation of the transit passes including the quantity sold, the number actually distributed, the unsold passes, and the cash proceeds. You are unable to reconcile the past two months. The bus passes are sequentially numbered and, in checking the sequence, you notice that numbers 9750 to 9820, 11012 to 11750, and 22000 to 22440 cannot be accounted for. You bring this to the attention of the supervisor, who tells you that reconciliations are never done; the job was created by her superior to give you something to do" and you are told not to worry about it. Required 1. What is the main objective of internal control and how is it accomplished? 2. Why should recordkeeping of assets be separated from custody over the assets? 3. Quantify the potential error that the missing bus passes could create. Should you report your findings?

Answer 1

1st Answer

Main objective of internal control are as follows:

• To ensure that the business transactions take place as per the general and specific authorisation of the management.
• To make sure that there is a sequential and systematic recording of every transaction, with the accurate amount in their respective account and in the accounting period in which they take place. It confirms that the financial statement fulfills the relevant statutory requirements.
• To provide security to the company’s assets from unauthorised use. For this purpose, physical security systems are used to provide protection such as security guards, anti-theft devices, surveillance cameras, etc.
• To compare the assets in the record with that of the existing ones at regular intervals and report to the those charged with governance (TCWG), in case any difference is found.
• To evaluate the system of accounting for complete authorisation of the transactions.
• To review the working of the organization and the loopholes in the operations and take necessary steps for its correction.
• To ensure there is the optimum utilization of the firm’s resources, i.e. men, material, machine and money.
• To find out whether the financial statements are in alignment with the accounting concepts and principles.

Objectives of internal control can be accomplished by implementing following controls.There are different types of internal controls, and each has a specific purpose. They all aim to improve a company's efficiency and performance while mitigating risks. These include:

1. Preventive controls: The objective of preventive controls is to keep errors from occurring in the first place and ensure that all the departments are meeting their goals. For example, your management team can check the organization’s inventory, security systems, equipment and other assets, authorize employees to perform specific tasks and approve various procedures.

2. Detective controls: The objective of detective controls is to identify the cause of problems and irregularities within your organization. This includes comparing information about current performance to forecasts, budgets and previous results in order to determine company performance.

3. Corrective controls: The objective of corrective controls is to correct errors. For example, your company's management team may recommend backing up data in order to recover essential information in the event of a crash or security breach. This type of audit usually includes detective and preventive controls.

2nd Answer

Record keeping of assets should be separated from custody over the assets because of the maker and checker concept. The one who is the custodian of the assets should not be given the work of recording the same assets transaction as there are high chances that the custodian will manipulate accounting entry and take away some asset for which the custody is given to him. Therefore the record keeper must be a separate person which will record the entry correctly and there are less chances of fraud in the company.

3rd Answer

The potential error that the missing bus passes could possibly create is that the bus passes would have been sold for money and not accounted for in the books whose benefit might have been taken by either the conductor or the supervisor. Yes we must report the findings as there are high possibility of fraud taking place in the organisation.