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7-2 Final Project Milestone Three: Report on Internal Control
ACC645
SNHU
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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
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members and 5 senior management. Minutes 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
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firm. Monthly meetings are held by the management of EarthWear Clothiers in order to
discuss recent events. The 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). aa 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
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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 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
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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 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
