Internal Control Preventive Maintenance Program Accounting Essay

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Controls in general play integral role in managing risk, minimizing unexpected actions, and achieving organization's goals and objectives, therefore it is important to balance between controls and risks in-order to obtain reasonable assurance over the financial reporting, here comes the importance of effective internal control system within the entire organization.

Essentially every business should have at some level effective internal control system in place to protect against errors, fraud and losses, regardless the size and the complexity of the business. Here comes the magnitude of an effective internal control system consists of policies and procedures designed to provide reasonable assurance over financial reporting, and reduce material misstatement in the financial statements that has an effect on the dependability and reliability of the organization in the market.

The objective of this study is to evaluate the efficiency of internal control system of Palestinian commercial banks. Moreover to determine the effects of internal control over management, internal auditor and external party's. Furthermore find out the weakness of internal control system of these banks and giving some suggestions to improve them.

Chapter 2

Literature Review

Many Articles have discussed the importance of internal control in different issues; some examples of these articles are as follow:

Author: Sunil Verma

Article: Internal Control Preventive Maintenance Program

Date Submitted: (2009)

He said that internal system is very essential for every business regardless the size and the complexity of the business, also it helps to stop losses, he says" If the theft doesn't put the owner out of business, it certainly causes a major headache" and he indicates that every organization in the world need internal control system and the internal control system will:

1) Protect cash and other assets

2) Promote efficiency in processing transactions

3) Ensure reliability of financial records

He gave a simple definition of the internal control system primarily of "policies and procedures designed to provide reasonable assurance that these three objectives will be achieved" and indicates "that the size and complexity of the business will determine the extent of the internal control system".

He gives good suggestions for internal control procedures regarding handling of cash:

Allow only specific designated individuals to handle cash.

Give responsibility for bookkeeping to an individual who does not handle cash.

Use numbered receipts to document all payments.

Make all bank deposits promptly.

The person who prepares the bank reconciliation should be different than the one handling cash.

If possible, the person who makes the bank deposit should be different than the one who handles the cash and the one who prepares the bank reconciliation.

Make deposits intact with no amounts withdrawn to pay expenses.

Keep cash and checkbook in a locked drawer or cash register.

Since tills will never be 100% correct all the time, establish a tolerance level for overages and shortages to determine the point at which corrective measures will be triggered.

Make all disbursements by check, except minimal amounts paid from petty cash.

Make certain every payment is related to a paper document, such as a voucher, to ensure that a paper trail exists for all disbursements.

Conduct random surprise counts of petty cash and cash drawers.

Count inventory and other assets frequently and compare with company books.

Author : Mei Feng, Chan Li, Sarah McVay

Article: Internal Control and Management Guidance

Date submitted: (2009)

This study determines the relation between internal control quality and the accuracy of management guidance. 2994 firms were investigated through conducting two tests a change analysis and cross sectional test based on the type of material weaknesses reported. They hypothesized "earning guidance will be less accurate in the presence of material weaknesses in internal control, as, managers are using lower quality financial inputs to form this guidance".

They reach to the following results; firms that disclose ineffective internal controls have significantly larger management forecast errors than do firms that report effective internal controls .Moreover they find that internal control quality has an economically significant effect on internal management reports and thus decisions.

The disclosure of a material weakness in internal control is an acknowledgement by managers that their internal control system may not curtail material errors in their firm's financial reports. Material weaknesses can also affect the accuracy of management guidance through decreasing the quality of the internal management reports used for forecasting. The study was conducted for several reasons. First of all, managers have an motivation to produce accurate management forecasts as guidance is one of the mechanisms that managers use to establish or change earnings expectations , decrease litigation risk , and improves a firm's reputation , accordingly documenting precise guidance is informative to managers, market participants and researchers. Second, diminish the negative effects of internal control quality on reported earnings quality. Finally, it helps managers to make day-to-day operational decisions.

Author : James Brayn

Article: Internal Controls Help Business Run Efficiently

Date submitted: (2010)

In this article the writer mainly focused on internal control as a preventive tool rather than a corrective tool, it prevents losses as a result of fraud and errors.

From the writer point of view he indicates that accounting record must be part of internal control and they have to be kept well in order to prevent losses and fraud, they must be periodically checked to ensure accuracy also. Furthermore every business should have managerial and administrative controls to make sure that operation are run efficiently.

Chapter Three

General Aspects

Internal Control:

Objectives and Roles of the Internal Control:

Performance objectives: Internal controls pertain to the effectiveness and efficiency of the bank in using its assets and other resources and protecting the bank from loss. The internal control process seeks to ensure that personnel throughout the organization are working to achieve its goals with efficiency and integrity, without unintended or excessive cost or placing other interests (such as an employee's, vendor's or customer's interest) before those of the bank.

Information objectives: Address the preparation of timely, reliable, relevant reports needed for decision-making within the banking organization. They also address the need for reliable annual accounts, other financial statements and other financial-related disclosures and reports to shareholders, supervisors, and other external parties. The information received by management, the board of directors, shareholders and supervisors should be of sufficient quality and integrity that recipients can rely on the information in making decisions. The term reliable, as it relates to financial statements, refers to the preparation of statements that are presented fairly and based on comprehensive and well-defined accounting principles and rules.

Compliance objectives: Ensure that all banking business complies with applicable laws and regulations, supervisory requirements, and the organization's policies and procedures. This objective must be met in order to protect the bank's franchise and reputation.

Importance of Internal Control:

A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organisations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organisation will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the bank's reputation.