Running Head: INTERNAL CONTROL a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 1
7-2 Final Project Milestone Three: Report on Internal Control
ACC645
SNHU
October 9,2022
INTERNAL CONTROL a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a
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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 members and 5 senior management.
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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 firm. Monthly
INTERNAL CONTROL a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a
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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). 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
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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 significant deficiency that needs to be addressed.
To address this issue, the reconciliation of subsidiary ledgers is vital.
E. Monitoring Activities
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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
