Richard Palm is the accounting clerk of Olive Limited. He uses the source documents such as purchase orders, sales invoices and suppliers’ invoices to prepare journal vouchers for general ledger entries. Each day he posts the journal vouchers to the general ledger and the related subsidiary ledgers. At the end of each month, he reconciles the subsidiary accounts to their control accounts in the general ledger to ensure they balance. Discuss the internal control weaknesses and risks associated with the above process. (10 marks 300 words)

Olive Limited

1) Internal Control Weaknesses: Richard Palm is just an accounting clerk and obviously there is a lack of qualification for him to single-handedly complete his work without supervision.  He handles the whole processes of identifying source documents, the accounts involved, and their correctness, preparing the journal, posting to the ledgers, and leger accounts reconciliation.  This shows that there is no segregation of duties. There is no personnel that authorizes or reviews Richard's accounting processes.  He engages in self-review (reconciliation) of his work.

2) The risks associated with Richard's process are:

a) Richard lacks the required professional experience and qualification to handle most of his work alone.  Thus, the risk of misstatement of financial statement elements is high.

b) Since Richard works without appropriate supervision, there is an increased risk of fraudulent behaviors.  Richard could post fictitious invoices to the accounting records.

c) Without separation of duties, a single individual handles a transaction from the beginning to the end.  This does not augur well for internal controls, which can be easily compromised.

d) Designated managers should be required to authorize certain types of transactions to add an extra layer of responsibility to accounting records.  This also proves that transactions have been seen, analyzed, and approved by appropriate authorities.   The requirement that large payments and expenses be approved by specific managers stop unscrupulous employees from making large fraudulent transactions with company funds, for example.

e) Richard also self-reviews his work.  Thus, it may be difficult for him to identify errors of misstatement.  An invoice could be posted more than once in the accounting records without being identified.

Explanation:

Internal controls are business processes that provide reasonable assurance so that several key business objectives are met, processes are operating efficiently, the financial reporting is reliable, and that the business is in compliance with applicable regulations and internal procedures.

Weaknesses occur when there is an absence of internal controls or the controls are not being operated as specified or the control objectives are not being achieved.  When any of these are prevalent, risks arise.  The risks may lead to intentional and unintentional financial statement misstatements or fraudulent practices.

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