PM Module Four: Assignment Guidelines And Rubric

12622 935 Pm Module Four Assignment Guidelines And Rubric Acc 20

Explain the role of internal controls in business settings and how the absence of internal controls may impact the accurate analysis of wrongdoing. Recommend at least two internal controls to prevent inventory from going missing, including assumptions about the root cause and how these controls address the issue. Additionally, suggest at least one control to alert the owner if inventory is missing. If two $400 HD televisions are missing, identify which financial statements need correction, specifying accounts and amounts.

Paper For Above instruction

Internal controls are a fundamental component of effective business management, serving as the mechanisms that safeguard assets, ensure the accuracy of financial records, and promote operational efficiency. In the context of inventory management, internal controls help prevent theft, loss, or misappropriation of assets, and they facilitate the timely detection and correction of discrepancies. When internal controls are properly implemented, they establish a structured environment where responsibilities are clearly defined, physical assets are protected, and transactions are monitored systematically. Conversely, the absence of such controls can lead to vulnerabilities, allowing mismanagement or theft to go unnoticed and unaddressed, thereby distorting financial reporting and impairing managerial decision-making.

The role of internal controls in business settings extends beyond asset protection; they also promote accountability and integrity within the organization. For example, segregation of duties prevents any single individual from having excessive control over inventory processes, reducing the risk of theft or fraud. Physical safeguards, such as locked storage areas and surveillance cameras, ensure that inventory is not accessed or removed without authorization. Additionally, regular inventory reconciliations and audit trails serve to verify the accuracy of inventory records against physical stock, providing a means to detect discrepancies swiftly. Effective internal controls foster a culture of conscientiousness and transparency, which is essential for maintaining trust among stakeholders and ensuring compliance with regulatory requirements.

When internal controls are lacking, the organization faces significant challenges in accurately analyzing wrongdoing, such as theft or misappropriation. Without controls like inventory counts or approval processes, discrepancies may go unnoticed for extended periods, complicating efforts to identify the responsible parties and assess the extent of loss. Moreover, the lack of detailed records and audit trails makes it difficult to reconstruct transactions or investigate issues thoroughly, leading to potential financial inaccuracies. This can result in inflated inventory values, understated expenses, and misleading financial statements, which ultimately erode stakeholder confidence and could have legal and financial repercussions.

To prevent inventory from going missing in the business scenario described, implementing specific internal controls is essential. First, establishing a routine inventory count—preferably daily or weekly—can serve as a critical safeguard. This process should involve multiple employees to ensure objectivity and reduce opportunities for theft. Regular reconciliation of physical inventory against recorded quantities will highlight discrepancies promptly, allowing for immediate investigation. Second, implementing a controlled access system and sign-in/out logs for the warehouse area adds a layer of security by limiting access to authorized personnel only. This control also ensures accountability, as any removal of inventory can be traced back to individual employees, deterring theft.

Furthermore, an effective control to alert the owner about missing inventory could involve employing inventory management software equipped with real-time monitoring and automated alerts. Such systems can flag significant discrepancies or unusual activity in stock levels, instantly notifying management of potential issues. This proactive approach enables swift intervention, minimizing losses and maintaining accurate records. For example, if two $400 HD televisions are discovered missing, these discrepancies would require adjusting the inventory and financial records to reflect the loss accurately.

In terms of financial statement corrections, the initial step involves recognizing the loss of the inventory—namely, the two missing HD televisions valued at $400 each, totaling $800. The primary financial statements affected include the balance sheet and the income statement. On the balance sheet, inventory will decrease by $800, which directly impacts the total current assets. Simultaneously, the loss should be recorded in the income statement as an expense—specifically, an inventory loss or cost of goods sold (COGS)—also totaling $800. If these adjustments are made after the financial statements have been prepared, corrective entries must be journalized and reflected in revised financial reports to maintain accuracy and compliance.

Proper correction involves reducing inventory assets on the balance sheet by $800 and recognizing an expense of the same amount in the income statement to reflect the loss accurately. This dual adjustment ensures that financial statements present a truthful view of the company's financial position, capturing the actual reduction in assets and the corresponding impact on net income. Moreover, these adjustments are vital for external reporting, tax considerations, and internal decision-making processes, emphasizing the importance of internal control systems to prevent such losses and accurately record them when they occur.

In conclusion, internal controls are indispensable for maintaining asset security, ensuring accurate financial reporting, and supporting operational integrity. Their absence not only exposes businesses to increased risk of theft and fraud but also hampers the ability to conduct reliable financial analysis. The implementation of routine inventory counts, controlled access mechanisms, and real-time inventory monitoring can significantly mitigate the risks associated with missing inventory. When losses occur, precise adjustments to financial statements are necessary to uphold transparency and accountability. Ultimately, a comprehensive internal control system contributes to the long-term stability and success of a business by safeguarding its assets and ensuring financial statements reflect the true state of affairs.

References

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  2. Gow, I., & Tata, J. (2019). Asset protection strategies and internal control systems. International Journal of Audit and Risk Management, 7(3), 220-237.
  3. Moeller, R. R. (2020). COSO internal control—integrated framework. John Wiley & Sons.
  4. Arens, A. A., Elder, R. J., & Beasley, M. S. (2019). Auditing and Assurance Services. Pearson.
  5. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting. Wiley.
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