M3A1 Discussion—Evaluating Internal Controls
Peer 1
M3 Ass 1
Armando Salinas posted May 28, 2018 9:20 PM
Internal control is a process that assures achievement of an organization’s objective in its operational effectiveness and efficiency. It is also the process of reliable reporting and compliance with laws, regulations and policies. Internal control involves everything that can control risk in an organization. This means that it dictates where resources are directed, how they are monitored and measured which plays an important role in detecting and preventing fraud which will protect the organization’s resources. According to the SEC Section 404 the company is required to report on “management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting in accordance with standards established by the Public Company Accounting Oversight Board” (U.S. Securities, 2003). With a private entity the regulations have increased dramatically because a rising number in accounting scandals. Private companies are not subject to SOX they also tend to have poor internal controls that leaves the company at risk which can result in financial consequences. The risks range from encouraging unethical behavior to exaggerated profits or overpayment of taxes. The GAAS is a set of standards where the audit quality is looked at and can be judged.
The article I read talks about the accountants in North Virginia detected and handled the internal control weakness in their organizations. They used their perceptions to detect fraud it also talks about how internal controls play a critical role in all organizations (U.S. Securities, 2011). This article was a study that takes the accountants perspectives into account, how they used there on the job training to prepare themselves for the weakness they found. This study is a multiple case study which looks at informal interviews and document the reviews that were conducted. Fannie Mae and Freddie Mac were two major players in the mortgage market and the rising home values were partly funded by their flow of money. Wall street started buying riskier loans and approving borrowers who did not qualify for the loan. These loans had a higher interest rate which caused housing prices to go up in a sense creating a bubble that was inflating. Fannie Mae and Freddie Mac entered into a Non-Prosecution Agreement with the SEC in which the company agreed to accept responsibility for its conduct and not dispute, contest, or contradict the contents of the statements (U.S. Securities, 2011). There were a lot of internal control problems within the companies it is believed that even if the companies had existed a bubble would have still been created and the market would still have crashed. However, the article I read believes that it was the “Internal personnel who were responsible for 80% of the financial losses suffered by companies due to fraud; however, it is not clear how the fraud occurred. Ineffective controls led to massive accounting frauds worldwide, several of which occurred in North Virginia companies” (Appiah, 2015) like Fannie Mae and Freddie Mac.
Reference
Appiah, E. A. (2015). Exploring the perceptions of northern Virginia accountants on internal control weaknesses resulting in accounting fraud (Order No. 3745274). Available from ProQuest Central. (1756272654). Retrieved from https://login.libproxy.edmc.edu/login?url=https://search-proquest-com.libproxy.edmc.edu/docview/1756272654?accountid=34899
U.S. Securities. (2003) https://www.sec.gov/news/press/2003-66.htm
Way M3_A1
Michael Way posted May 28, 2018 9:48 PM
For a public and private company internal controls are considered by the auditor. When an external audit is preformed these controls are tested to see if they are valid for the company. The difference is that public companies when audited these controls are tested to see if they meet the industry standard, and that require a large amount of effort, and therefore money. If these controls are not adequate based on testing then further records are looked into. For private companies there is no requirement for internal controls to be tested. Once an audit team agrees that the controls appear to be documented and implemented the external audit teams they proceed with the simpler and cheaper audit. So private companies are given a choice whereas public companies are not.
https://www.journalofaccountancy.com/issues/2018/may/fraud-round-numbers.html
This example takes place out of the US with and India based company. The just of the article is that certain managers had the ability to modify revenue reporting systems. These personal used this ability to create false sales under false company names to appear to boost revenue. Other managers without access were unable to see the full transactions and therefore pay them no mention. There mistake was using nice round number for these transactions. Based on the article round numbers are general found in unique purchases not random sales with many difference customers. While these amounts had to be listed on the sales receivable they went undetected for 5 years.
The SOX act had already been created at this time within the US. It would have been able to find this fraud much earlier as the system explains the many ways a person or persons can fraud a business for personal or business gain. Auditors should look for these round number, even though many business have large quantity of round number transactions, the type of transaction should be looked into if it is repeated enough times.
Round numbers: A fingerprint of fraud. (2018, May 01). Retrieved from https://www.journalofaccountancy.com/issues/2018/may/fraud-round-numbers.html