LITERATURE REVIEW The Impact of internal controls could raises serious issues depending on what rules and regulations are in place for the clients that Damian Services serves. According to the Sarbanes-Oxley Act of 2002 there could be serious penalties on the companies, executives with fines of up to $5 million and possible imprisonment of 20 years or more. (Barra, 2010) Internal controls must be in order so that the success of the company can assured and financial reporting is accurate. Having this in place reduces the potential fraud that could occur within a company. Some of the most fraud takes place with travel expenses and payroll. This has been found as one of the biggest issues that come up when a company is experiencing fraud. …show more content…
Most of these laws are used within an organization as well to help aid in the accurate reporting of the financial reports and help them organize internal and audit controls within the organization to prevent potential fraud and misappropriation of funds. Sarbanes-Oxley Act 2002 mandates that all preparers, auditors, analysts, and users operate and know the importance of governance and internal controls. (Huefner, 2011) The Treadway Commission’s (COSO) The Committee of Sponsoring Organizations lists the objectives of internal controls and its importance. (Huefner, 2011) Internal Controls have to be monitored often. These are controls that change overtime based on the needs and the functionality of the organization. Random audits are one way to identify problems that may arise with internal controls. If this is not done often, it suggests that there could be a weakness in internal controls. Weakness in controls leads to fraud to occur within a company. If there is no monitoring of the internal controls than there is a risk of fraudulent behavior among employees and potential misappropriation of funds when reporting financial reports to the federal government. There is no validity to financial reports created and the auditor or professional accountant completing the financial reports …show more content…
The organizations audit controls and internal controls must be reviewed and changed so that the fraud and misappropriation of funds can be handled and bring back the integrity of the company. The purpose of internal controls is to eliminate the potential fraud that could take place within a company. In this case the client that Damian services has been losing money and their financial reports are not matching with the reports conducted by Damian services. The cash flow problem is reoccurring when auditing reports for each quarter in order to pay the company’s taxes to the federal government. This is due to there not being enough revenue to cover the company’s debt. This is also bad for shareholders and investors when it comes to the review of the company and its assets versus its liabilities. The company is showing that they are currently unable to handle their debts based on the financial reports analyzed. Listed are ways in recreating the internal controls for the
First and foremost, the accounting system used should be updated. The case stated that the system was 30 years old and that prior accounting period transactions could not be locked down, which enabled internal control processes to be bypassed. Enhancing internal
With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.
Having internal controls is one thing, but how the company evaluates that control is a matter all by itself. Being an independent auditor, it is our job to understand an entity and
To conduct the audit, the firm must acquire sufficient understanding of the internal control processes to help determine the nature and timing of the audit. However, the audit is not designed to identify deficiencies in internal control or provide assurance. The firm will make the audit committee aware of any significant deficiencies that come to Anderson, Olds, and Watershed’s attention during the audit.
The act is an exhaustive piece of legislation that contains eleven major section and some of the most important titles outline requirements on auditor independence, analyst conflict of interests, corporate responsibility, enhanced financial disclosures, internal controls assessment, and corporate fraud accountability (Bainbridge, 2007). One of the main benefits of the legislation is to establish auditor independence requirements and rules for the prevention of conflicts of interest in particular by prohibiting auditing firms from offering other services. Prior to Sarbanes–Oxley, the auditing professionals were self-regulated and the decisions that controlled the industry, such as violation of ethical standards, were made largely by auditors themselves (Verschoor, 2012). In order to prevent conflict of interests, the Sarbanes–Oxley Act grants the PCAOB authority to oversee and regulate auditing firms, conduct investigations, and impose disciplinary sanctions against accounting firms (McDonough, 2004). Another provision of the Act is requiring senior executives to be personally accountable and responsible for the financial information reports by certifying that the information is correct.(Welch, 2006). A byproduct of the law implementation is a significant quality improvement on accounting practices;
Corporate fraud was the cornerstone for the strict implementation of the Sarbanes-Oxley Act of 2002 (SOX). SOX implements many compliance regulations, but one of its regulations, specifically Section 404, relates to an organization’s internal control procedures with the purpose of protecting organizational assets and investors’ interest. Consequently, organizations, big or small, private or public, are prone to fraud. SOX’s compliance of internal control procedures is developed through the Committee of Sponsoring Organizations of the Treadway Commission (COSO) known as the COSO framework that consists of the following procedures: control environment, risk assessment, control activities, information and communication and monitoring. Each variable address a layer that builds upon each other by
Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.
Internal controls represent an organization’s processes and procedures used to meet its goals and objectives and serve as a defense in safeguarding assets and preventing and detecting errors, fraud, and abuse. Effective internal controls provide reasonable assurance that an organization’s objectives are achieved through (1) reliable financial reporting, (2) compliance with laws and regulations, and (3) effective and efficient operations. The passing of the Sarbanes-Oxley Act of 2002, as well as the numerous corporate frauds and bankruptcies over the past decade—including some
The auditor must obtain an understanding of the entity and its environment, including internal controls, so that they can identify and assess the risks of material misstatement on financial statements due to fraud or error and design and perform further audit procedures.
The Sarbanes-Oxley Act (SOX) was enacted in July 30, 2002, by Congress to protect shareholders and the general public from fraudulent corporate practices and accounting errors and to maintain auditor independence. In protecting the shareholders and the general public the SOX Act is intended to improve the transparency of the financial reporting. Financial reports are to be certified by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) creating increased responsibility and independence with auditing by independent audit firms. In discussing the SOX Act, we will focus on how this act affects the CEOs; CFOs; outside independent audit firms; the advantages and a
The final responsibility for the integrity of an SEC registrant’s internal controls lies on the management team. U.S. companies need to refer to a comprehensive framework of internal control when assessing the quality of financial reporting to determine that financial statements are being presented under General Accepted Accounting Principles, GAAP. The widely used framework is referred as COSO, Committee of Sponsoring Organizations of the Treadway Commission, sponsored by the following organizations American Accounting Association, the American Institute of CPA’s, Financial Executives International, the Institute of Internal Auditors, and the Institute of Management Accountants. COSO’s defines internal control as:
The control environment is what sets the tone for an organization and is the foundation for all other components of internal control. It provides discipline and structure and reflects the ethical values, integrity and competencies of the organization. The control environment is very important to effective internal control over financial reporting to an audit client like WorldCom, because good designs can prevent and detect frauds and errors. But because WorldCom had such a poor control environment, the company would require more testing for an audit. This shows that the board did not exercise oversight responsibilities over financial reporting or internal controls.
A business can not work out without an account system, which includes internal. Internal controls are used by companies to make sure financial information is accurate and valid. Strong internal controls are signs of a financially healthy company and protect the company’s integrity. Strong internal controls can also increase a company’s profitability. There are several types of internal controls that companies used to protect themselves such as: Segregation of duties, asset purchases, supervisor review, internal audits and adequate documents and records. This paper will discuss several topics from a case study about And the Fraud
Effective internal controls protect a company’s assets, maintain compliance, improve operations, prevent fraud, and promote accuracy in financial reporting. In 1992 the
The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.