Running Head: INTERNAL CONTROL i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 1
7-2 Final Project Milestone Three: Report on Internal Control
ACC645
SNHU
INTERNAL CONTROL i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 2
Willis & Adams have undertaken the task of performing an audit for the client
EarthWear Clothiers. Five components of internal control have been evaluated. The core
objective is to identify any potential gaps that might result in material deficiencies and
misstatements. The report also includes appropriate recommendations in order to improve the
gaps and avoid the risks of misstatements.
In order to conduct the evaluation of the internal control of EarthWear Clothier, the
COSO framework has been used. The main aim is to enable the firm to assess, establish, and
enhance the existing internal controls. COSO provides the firm with a roadmap to build a
foundation of internal control to monitor and mitigate organizational risks through effective
business decisions (Coso Internal Control – Integrated Framework, 2021).
A. Control Environment
The prominent factors of the control environment include the ethical values, integrity,
and competence of the people of the firm, the operating style and philosophy of the management,
the manner in which responsibility and authority are assigned by the management, and the
direction and attention provided (Internal controls. Audit & Advisory Services, 2021). The
control environment focuses on setting the tone of the organization and influences the overall
internal control system.
Appropriate control and solid control environment exist in the firm EarthWear Clothiers.
The organization is very serious about misstatements and takes proper measures in order to
mitigate the potential risks of misstatements. The firm makes use of the policies of the
conservative account. The Board of EarthWear Clothiers meets on a quarterly basis to review
the performance. They also meet in case there is a transaction or event affecting the operations of
the company. The Board consists of 4 independent members and 5 senior management. Minutes
INTERNAL CONTROL i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 3
of the meeting are properly maintained and kept by the corporate secretary, and the board
approves the minutes.
EarthWear Clothiers has a well-designed organizational structure. The roles and
responsibilities are effectively communicated to the employees by the upper management. The
independent audit team of the firm consists of two directors who are not part of the management
team. The management of EarthWear Clothiers consults Willis & Adams in the event of any
accounting issues.
However, one of the gaps that have been identified in the EarthWear Clothiers is the lack
of a proper succession plan. For instance, Brad Norton, the controller of the firm, had to leave
unexpectedly. The gap between the leaving of the former controller and the appointment of the
new controller was long. Moreover, Willis & Adams has doubt regards the appropriateness of
the new controller for the position. In order to improve such gaps in the future, it is recommended
that EarthWear Clothiers must focus on the design and implement a proper succession plan to
avoid delay. The identified gap in terms of the control environment is a significant deficiency.
B. Risk Assessment
Risk assessment refers to the analysis as well as identification of the potential risks for
the achievement of the organizational objectives. It forms the basis for the effective
management of risks (Internal controls. Audit & Advisory Services, 2021).
The current risk assessment policies of EarthWear Clothiers are well-designed and
effective. All the objectives of the firm have been clearly communicated as well as monitored.
The risk management department is responsible for identifying potential risks and
recommending appropriate actions. EarthWear Clothiers has a risk management committee that
oversees how future events are likely to impact the functioning of the firm. Monthly meetings
are held by the management of EarthWear Clothiers in order to discuss recent events. The
INTERNAL CONTROL i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 4
management is well aware of the current risks thar are likely to affect the organization.
Moreover, the management also focuses on finding alternative product sourcing to effectively
meet the growing requirements in the event of increased competition. In terms of current risk
assessment, no gaps have been found by Willis & Adams.
However, the potential gap in risk assessment of EarthWear Clothiers could be a
material misstatement. It is a case of significant deficiency. In order to address the gap, it is
important to assess different accounts, such as revenues, cash, as well as receivables. Each of the
accounts carries a different level of risk. For instance, payroll and cash have the lowest risk. On
the other hand, revenue and receivables have the highest risk. Regular monitoring of the
accounts is vital to address the gap and lower the chances of material misstatements.
C. Information Systems
According to the COSO framework, information should be collected by the management
from both external and internal sources in order to effectively support the components of internal
control(Coso Internal Control – Integrated Framework, 2021). In terms of standard as well as
automated information systems, no notable issues have been identified by Willis & Adams in the
case of EarthWear Clothiers.
The standard information system of EarthWear Clothiers is open as well as free flowing.
The audit committee of the firm meets the external and internal auditors on a regular basis in
order to discuss the matters that affect the internal controls of the organization. Information
relating to the objectives of EarthWear Clothiers is properly analyzed and monitored. Moreover,
each of the departments of the organization provides its financial reporting in a timely manner.
All the employees of the firm are provided with clear information relating to their duties and
responsibilities. They are also provided with adequate training. EarthWear Clothiers has a
INTERNAL CONTROL i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i 5
system in place for reporting any policy violations. Communication is open as well as
transparent across all the departments of EarthWear Clothiers.
The automated information system used by EarthWear Clothiers functions in the correct
manner. The automated system implemented by the organization is responsible for maintaining
accounts receivable, general ledger modules, integrated inventory, and payroll. The system is
properly integrated with the EDI system for streamlined operations of the firm. The system
ensures proper control as well as accountability.
In order to address the transaction gaps of the organization, EarthWear Clothiers has a
strategic plan. The information systems for financial reporting are updated on a regular basis.
The gap in terms of information systems is material weakness.
D. Control Activities
Control activities refer to the different activities established through procedures and
policies, ensuring that the management directives are carried out in the correct way. They help in
mitigating the potential risks to the attainment of the objectives of the firm (Coso Internal
Control – Integrated Framework, 2021). EarthWear Clothiers focuses on maintaining good
control. However, several gaps have been identified by Willis & Adams. One of the gaps relates
to intercompany transactions. The transactions are frequently material. In order to address the
gap, EarthWear Clothiers must design as well as implement a process for reconciling
intercompany accounts. Another gap is the improper transaction recording in the subsidiary
ledgers. This control failure is a significant deficiency that needs to be addressed. To address this
issue, the reconciliation of subsidiary ledgers is vital.
E. Monitoring Activities
At present, EarthWear Clothiers has effective monitoring activities in place. Customer
complaints are addressed in a timely manner, and customer recommendations are taken into
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consideration by the firm. In terms of monitoring activities of EarthWear Clothiers, no gaps have
been identified by Willis & Adams.
In order to address the current internal control failures, new internal controls must be
created by EarthWear Clothiers. The auditor must understand the control design implemented
by the firm and monitor the cashflows regularly. The succession plan of EarthWear Clothiers
must be monitored to ensure that employees are promoted and the important vacancies are filled
without delays.
References
Coso Internal Control – Integrated Framework. (2021). Retrieved October 8, 2022, from
https://www.coso.org/Shared%20Documents/CROWE-COSO-Internal-Control-
Integrated-Framework.pdf
Internal controls. Audit & Advisory Services. (2021). Retrieved October 8, 2022, from
https://audit.ucsf.edu/internal-
controls#:~:text=Internal%20control%20is%20a%20process,regulations%2C%20contr
acts%2C%20policies%20and%20procedures
