Accountant Education Term Paper

Excerpt from Term Paper :

Internal Control Limitation

Limitations in the internal control system consist of lack of training or communication, collusion, lack of management support, human error, staff size, or cost benefit considerations. Lack of training or communications can consist of employees not being trained in internal controls or not understanding correct procedures (McIntosh). Collusion is where employees find ways to work around the internal control system. It can include two or more employees exchanging passwords and entering false transactions. Lack of management support constitutes the tone at the top. Without management support, employees are not properly supervised.

Human error comes from carelessness, distraction, misunderstanding, or mistakes in judgment (Rennels). If a company does not have adequate staff size, segregation of duties are not proper for internal control and staff fatigue or stress can also cause weak internal controls. The benefit of the internal control should be more than the costs. If the benefit does not outweigh the cost of the internal control, the organization may not implement the control.

A good internal control procedure is the audit trail. Every transaction should be able to be traced from the ledgers back to the original transaction document. For example, a transaction recorded in the sales journal should also be recorded in the sales account and the cash or accounts receivable account. And, the transaction should be verifiable to the original sales invoice. The sales invoice should show where the sales amounts have been verified on the sales invoice. The audit trail also includes a policy and procedures manual that includes the chart of accounts, a complete description of the types of source documents individuals must use to record accounting transactions, and a comprehensive description of the authority and responsibility assigned to each individual (Bagranoff, 2010).

Sound policies and practices acts as an internal control that when enforced and monitored by management helps employees to be fair and honest in ways that the use of company assets are efficiently used. The policies and practices enable management to encourage ethical behavior at all levels of the organization. This also requires that employees are strongly trained and understand the policies and the consequences for not following them. Training should also be an ongoing issue so employees are trained and made aware as changes in policy and legal requirements come up.

Segregation of duties structures work assignments so one employee's work serves as a check on other employees. For example, authorization being required for certain items allows management to check on an employees work to ensure that policies are followed. If an employee has custody of cash and records transactions, transactions can be manipulated and…

Sources Used in Document:

Bibliography

Bagranoff, N.A. (2010). Accounting Information Systems. Hoboken, NJ: John Wiley & Sons, Inc.

McIntosh, K.A. (n.d.). What are The Limitations of Internal Control in Accounting? Retrieved from eHow Money: http://www.ehow.com/list_7463602_limitaions-internal-control-accounting_.html

Red Flags of Fraud. (n.d.). Retrieved from University of Texas - Arlington: http://www.uta.edu/internalaudit/documents/Fraud%20Red%20Flags.pdf

Rennels, M. (n.d.). What are Three Limitations of the Internal Control System? Retrieved from eHow Money: http://ehow.cominfo_8043208_three-limitations-internal-control-system.html

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